SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM U-1
APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
and
New England Gas Development Corporation
83 Edison Drive
Augusta, Maine 04336
(Name of company or companies filing this statement and
address of principal executive offices)
Anne M. Pare, Esq.
Treasurer, Corporate Counsel and Secretary
CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
Telephone: (207) 623-3521
(Names and addresses of agents for service)
Copies to:
Frank Lee, Esq.
Huber Lawrence & Abell
605 Third Avenue
New York, New York 10158
Telephone: (212) 682-6200
Item 1. Description of Proposed Transaction.
A. Introduction
Pursuant to Sections 3(a)(1), 9(a)(2) and 10 of the Public Utility
Holding Company Act of 1935, as amended (the "Act"), CMP Group, Inc. ("CMP
Group"), a Maine corporation and an exempt public utility holding company,
hereby requests that the Securities and Exchange Commission (the "Commission")
authorize the transaction described herein (the "Transaction") pursuant to which
CMP Group, through New England Gas Development Corporation ("New England Gas"),
a Maine corporation and a wholly-owned subsidiary of CMP Group, will acquire up
to 50% of the voting securities of CMP Natural Gas, L.L.C. ("Maine GasCo"), a
Maine limited liability company. Maine GasCo will construct, own and operate a
local natural gas distribution system (the "Maine GasCo System") which will
provide on a non-exclusive basis natural gas service in certain areas of Maine
that do not currently receive natural gas service. The remaining voting
securities of Maine GasCo will be held by Energy East Corporation ("EEC"),1 an
exempt public utility holding company, through Energy East Enterprises, Inc.
("EEC Enterprises"), a wholly-owned subsidiary of EEC, pursuant to a Joint
Venture Agreement dated as of November 13, 1997, as amended (the "Joint Venture
Agreement") between Central Maine Power Company ("CMP"), a subsidiary of CMP
Group, and New York State Electric & Gas Corporation ("NYSEG"), a wholly-owned
subsidiary of EEC. The Joint Venture Agreement is attached hereto as Exhibit
B-1.
As noted above, CMP Group is currently a public utility holding company
exempt from all provisions of the Act, except Section 9(a)(2), under Section
3(a)(1) of the Act by order of the Commission dated August 7, 1998. See, Central
Maine Power Company, et al., Holding Co. Act Release No. 26903 (1998). CMP Group
holds 100% of the common stock of CMP. CMP in turn owns 78.3% of the voting
securities of Maine Electric Power Company, Inc. ("MEPCo"), and 100% of the
voting securities of Aroostook Valley Electric Company ("AVEC") and NORVARCO.
CMP, MEPCo, AVEC and NORVARCO are public utility companies as defined under the
Act. CMP is also a public utility holding company exempt from all provisions of
the Act, except Section 9(a)(2), under Section 3(a)(1) of the Act by order of
the Commission mentioned above. Following consummation of the Transaction, CMP
Group will also own, through New England Gas, up to 50% of the voting securities
of Maine GasCo, which, when it begins commercial operation, will be a public
utility company as defined under the Act, and New England Gas will itself be a
public utility holding company as defined under the Act. Section 9(a)(2) of the
Act requires Commission approval of the Transaction because, by virtue of the
Transaction, CMP Group will own, directly or indirectly, more than 5% of the
outstanding voting securities of five public utility companies - CMP, MEPCo,
AVEC2, NORVARCO and Maine GasCo (when it begins commercial operation).
CMP Group seeks an order under Section 3(a)(1) confirming its exempt
status and New England Gas seeks an order under Section 3(a)(1) granting it an
exemption following the consummation of the Transaction. CMP Group and New
England Gas (when Maine GasCo begins commercial operation) will each be a public
utility holding company entitled to an exemption under Section 3(a)(1) of the
Act because both CMP Group and New England Gas, and each public utility
subsidiary from which they derive a material part of their incomes, will
continue to be organized and to operate predominantly in Maine. In addition,
since this application has no impact on CMP's status as an exempt public utility
holding company, CMP will continue to be entitled to an exemption under Section
3(a)(1) of the Act because CMP and each public utility subsidiary from which it
derives a material part of its income will continue to be organized and
operating predominantly in Maine. B. CMP Group and Subsidiaries
On September 1, 1998, CMP Group became the holding company for CMP and
its subsidiaries and certain non-utility companies, described below. CMP Group's
common stock is publicly traded on the New York Stock Exchange. CMP Group's
principal executive offices are located at 83 Edison Drive, Augusta, Maine
04336.
New England Gas was incorporated under the laws of the State of Maine
for the purpose of carrying out the proposed Transaction. New England Gas is
currently a direct, wholly-owned subsidiary of CMP Group. New England Gas does
not currently own any utility assets nor is it currently a "public utility
company" or a "holding company" within the meaning of the Act.
CMP Group's non-utility subsidiaries are engaged in activities designed
to capitalize on core competencies of the CMP system. Descriptions of these
subsidiaries follow:
a. CNEX, formerly called CMP International Consultants, provides
consulting, planning, training, project management, and
information and research services to foreign and domestic
utilities and government agencies in various aspects of
utility operations and utility support services.
b. MaineCom Services ("MaineCom") develops fiber-optic data
service for bulk carriers, provides other telecommunications
services, and holds direct or indirect voting interests in
various entities that are in the business of developing a
fiber-optics network in the Northeast.
c. MainePower is currently preparing to be able to operate as a
competitive energy marketer once electric competition
commences in Maine.
d. TeleSmart provides collections and related accounts receivable
management services and has a division which collects
charged-off accounts.
e. The Union Water-Power Company ("Union Water") (i) provides
river facilities management, including the management of
dams, reservoirs, fishways and oxygenation facilities, (ii)
provides utility support services such as underground
facility locating, infrared photography and work order
ticket management, (iii) provides real estate management,
development and leasing, and land and modular housing sales,
(iv) provides engineering, construction management and
environmental and licensing services, and (v) owns 25% of
the voting stock of Androscoggin Reservoir Company (the
remainder of the voting stock is owned by Public Service
Company of New Hampshire ("PSNH") and three paper
companies), which owns a storage reservoir and dam on the
Androscoggin River and owns real estate and other facilities
at Aziscohos Dam in northwestern Maine that it leases to a
qualifying facility. Union Water's interest in Androscoggin
Reservoir Company will be sold as a part of the asset sale
to an affiliate of FPL Group, described below.
CMP is an investor-owned Maine public utility incorporated in 1905 and
is a subsidiary of CMP Group. CMP is primarily engaged in the business of
generating,3 purchasing, transmitting, distributing and selling electric energy
for the benefit of retail customers in southern and central Maine and wholesale
customers, principally other utilities. Its principal executive offices are
located at 83 Edison Drive, Augusta, Maine 04336. As mentioned above, CMP is
currently a public utility holding company exempt from regulation under the Act
(except for Section 9(a)(2) thereof) by order of the Commission. CMP currently
has three subsidiaries that are public utility companies within the meaning of
the Act, namely MEPCo, AVEC and NORVARCO, and several non-utility subsidiaries.4
CMP is the largest electric utility in Maine. It serves approximately
528,000 customers in its 11,000 square-mile service area in southern and central
Maine. CMP had $954 million in consolidated electric operating revenues in 1997
(reflecting consolidation of financial statements with MEPCo). The electric
properties of CMP form a single integrated system which is connected at 345
kilovolts and 115 kilovolts with the lines of PSNH at the southerly end and at
115 kilovolts with Bangor Hydro at the northerly end of CMP's system. CMP's
system is also connected with the system of New Brunswick Power and of Bangor
Hydro through the 345-kilovolt interconnection constructed by MEPCo.
CMP has interests in 31 hydroelectric generating stations with an
estimated net capability of 373 megawatts. CMP also operates two oil-fired
steam-electric generating stations, William F. Wyman Station in Yarmouth, Maine,
of which CMP's entitlement is 594 megawatts, and Mason Station in Wiscasset,
Maine, with 145 megawatts of generating capacity. CMP also has internal
combustion generating facilities with an estimated aggregate net capability of
42 megawatts.
CMP has direct or indirect ownership interests in five nuclear
generating facilities in New England. The largest is a 38% common stock interest
in Maine Yankee Atomic Power Company ("Maine Yankee"), which owns a nuclear
generating plant in Wiscasset, Maine, that has been permanently shut down since
August 6, 1997. In addition, CMP owns a 9.5% common stock interest in Yankee
Atomic Electric Company, which has permanently shut down its plant located in
Rowe, Massachusetts, a 6% common stock interest in Connecticut Yankee Atomic
Power Company, which has permanently shut down its plant in Haddam, Connecticut,
and a 4% common stock interest in Vermont Yankee Nuclear Power Corporation,
which owns a plant in Vernon, Vermont. In addition, pursuant to a joint
ownership agreement, CMP has a 2.5% direct ownership interest in the Millstone 3
nuclear unit in Waterford, Connecticut.
CMP is subject to the regulatory authority of the Maine Public
Utilities Commission (the "MPUC") as to retail rates, accounting, service
standards, territory served, the issuance of securities maturing more than one
year after the date of issuance, certification of generation and transmission
projects and various other matters. CMP is also subject to the jurisdiction of
the Federal Energy Regulatory Commission ("FERC") under Parts I, II and III of
the Federal Power Act for some phases of its business, including licensing of
its hydroelectric stations, accounting, rates relating to wholesale sales and to
interstate transmission and sales of energy and certain other matters. The MPUC
also regulates, in some respects, MEPCo, NORVARCO, Chester, AVEC, Maine Yankee
and MaineCom. MEPCo, NORVARCO, Chester and AVEC are regulated by the MPUC in all
respects, except as to rates and short-term (one year or less) financings, which
are regulated by the FERC. Specifically, the MPUC's regulation over these
entities includes financings with maturities of more than one year, transactions
and other arrangements with affiliates, any acquisition or creation of entities
in which they hold at least a 10% interest, transfers of utility property and
construction of facilities. The MPUC regulates financings by Maine Yankee with
maturities of longer than one year and Maine Yankee's transactions with
affiliates. MaineCom is subject to regulation by the MPUC with respect to making
available a fiber optics cable for public use in Maine. MaineCom has also
received MPUC approval to provide local exchange and interexchange telephone
service in Maine and provides such service under contracts which are filed with
the MPUC as rate schedules. C. Description of the Proposed Transaction
1. The Joint Venture Agreement
CMP and NYSEG have executed the Joint Venture Agreement, which provides
for among other things, the formation of a joint venture company, Maine GasCo.
Maine GasCo is a Maine limited liability company, governed in accordance with
the terms and conditions of the Joint Venture Agreement. In contemplation of the
formation of holding company structures for both parties, the Joint Venture
Agreement was made assignable by both parties to their respective affiliates.
CMP and NYSEG have assigned their interests in the Joint Venture Agreement to
New England Gas and EEC Enterprises, respectively.
The Joint Venture Agreement provides that Maine GasCo will engage in
the business of owning, constructing, and operating a local natural gas
distribution system that will distribute natural gas and provide other related
local services in certain areas of Maine which do not currently receive natural
gas service. New England Gas and EEC Enterprises will be the initial members of
Maine GasCo. EEC Enterprises will hold at least 50% of the membership interests
and New England Gas will hold the remaining membership interests. Each member's
ownership interest is subject to adjustment in accordance with the Joint Venture
Agreement. New England Gas and EEC Enterprises will each contribute their
respective shares of the initial capital of Maine GasCo in amounts proportionate
to the ownership percentages of each such Maine GasCo member and will contribute
all or some portion of this sum in cash when the Management Committee requires
the contribution. Maine GasCo members will make additional capital contributions
if the Maine GasCo members holding a majority interest vote to require such
contributions, or if the Manager determines that Maine GasCo's cash reserves and
reasonably anticipated revenues are less than its budgeted working capital needs
for the next six succeeding months. Pursuant to the Joint Venture Agreement, net
profits and net losses will be allocated between the Maine GasCo members in
proportion to the ownership percentage that each Maine GasCo member holds.
The Joint Venture Agreement establishes a Management Committee
consisting of three New England Gas appointees and three EEC Enterprises
appointees and generally vests a designated Manager, who will be located in
Maine, with exclusive authority to manage the business of Maine GasCo within the
limitations set forth in the Joint Venture Agreement, the Articles of
Organization, or any Statement of Authority under the Maine Limited Liability
Company Act. The Joint Venture Agreement authorizes the Manager to perform any
and all acts customary or incident to the business of Maine GasCo. The Joint
Venture Agreement also authorizes the Manager to delegate authority and to hire
or contract for appropriate and necessary services. Certain actions may be taken
by the Manager only upon the affirmative vote of a majority of the members of
the Management Committee. These actions include the following: incurring
indebtedness, issuing obligations, confessing certain judgments, incurring
certain liabilities, making certain capital expenditures or incurring certain
operating expenses, consummating transactions between Maine GasCo and a Maine
GasCo affiliate or Maine GasCo member, establishing certain reserves, making
distributions to Maine GasCo members, contravening the Joint Venture Agreement,
causing Maine GasCo to become bankrupt or dissolve, transferring substantially
all of the assets of Maine GasCo, entering into derivative transactions,
declaring a distribution of profits, engaging in business acquisitions, calling
for certain additional capital contributions, appointing or removing an officer,
and establishing employee compensation.
A vote of the Maine GasCo members holding at least a majority of the
voting interests may remove the Manager with or without cause. The Maine GasCo
member who appoints a person to the Management Committee may remove such person
with or without cause at any time. The Manager and any Management Committee
member may resign at any time. Maine GasCo members holding a majority of the
voting interests may fill any vacancies in the position of Manager by
affirmative vote, which Manager will hold the position until the election and
qualification of a successor, or the Manager's resignation or removal. The Joint
Venture Agreement limits the liability of a Maine GasCo member for any debts or
losses of Maine GasCo to its respective capital contribution to Maine GasCo,
except as otherwise required by law. The Joint Venture Agreement provides for
the resolution of stalemates or impasses among the Management Committee by
appeal to the Chief Executive Officers of the Maine GasCo members, and by
arbitration in the event that the Chief Executive Officers are unable to resolve
the impasse.
The Joint Venture Agreement contains customary representations and
warranties, including representations regarding corporate existence and
authority to execute the Joint Venture Agreement. The Joint Venture Agreement
requires that any and all disputes arising therefrom will be settled by
arbitration in accordance with the procedures described above for the resolution
of stalemates or impasses, but authorizes injunctive relief when an arbitrator's
award would not adequately protect the rights of a party. The parties to the
Joint Venture Agreement have also agreed not to compete with one another with
regard to the business of Maine GasCo. In addition, any party that ceases to be
a Maine GasCo member will not hire employees of Maine GasCo for three years
after that party ceases to be a Maine GasCo member, and the parties have agreed
that Maine GasCo and any of its subsidiaries will not employ the employees of a
Maine GasCo member or an affiliate under certain conditions. The Joint Venture
Agreement contains other customary terms and conditions, including provisions
regarding indemnification, the use of confidential information, the holding and
conduct of meetings, distributions to Maine GasCo members, transfers of
membership interests in Maine GasCo, dissolution, and interpretation of the
Joint Venture Agreement.
2. Operations of Maine GasCo
Maine GasCo currently expects to furnish natural gas service in Maine
on a non-exclusive basis in the Bethel and Windham areas, the greater Augusta
area, the greater Waterville area, the greater Bangor area, and the coastal area
including Brunswick and Bath. Maine GasCo also anticipates furnishing gas
service to other towns, which are listed in Appendix A to this Application.
Maine GasCo expects to provide both merchant sales and transportation services.
Maine GasCo has evaluated whether it will provide transportation services to
small commercial and residential monthly metered customers. Due to the
relatively small size of Maine GasCo, the low load factors of such small
customers, and the lack of planned storage on the available pipelines, as well
as the administrative difficulty of tracking usage and operationally balancing
such usage and nominations for small pools of monthly metered customers, Maine
GasCo has determined that provision of such transportation services is currently
not feasible. If it becomes feasible, Maine GasCo expects to propose a small
customer transportation service based upon its operational capabilities.
As set forth in more detail in Item 4 - Regulatory Approvals, CMP Group
received authorization from the MPUC, in Docket No. 96-786, to furnish on a
non-exclusive basis, through Maine GasCo, natural gas service in such areas. In
this order, the MPUC noted that authorizing more than one local distribution
company to provide service in a given area will result in beneficial competition
to obtain customer load so that system expansion may ultimately be greater in a
given area than it would be if only one entity was authorized to provide service
in such area. A copy of this order is attached hereto as Exhibit D-1. In
addition, on May 1, 1998, the MPUC, in Docket No. 98-077, issued its order,
attached hereto as Exhibit D-2, authorizing the formation of New England Gas and
Maine GasCo, and authorizing the initial capitalization of Maine GasCo. In
accordance with this approval and the terms of the Joint Venture Agreement, the
proposed capital structure of Maine GasCo will be based on fifty percent (50%)
equity and fifty percent (50%) debt, which would finance an initial $40 million
construction program. New England Gas and EEC Enterprises plan to initially
capitalize Maine GasCo with an aggregate of $20 million in equity contributions
made by each party in proportion to its ownership percentage. New England Gas
and EEC Enterprises also plan to make available additional capital as necessary
and consistent with the rules and conditions established by the MPUC.
Maine GasCo expects to derive its supply of natural gas from the
Western Canadian Sedimentation Basin via the proposed Portland Natural Gas
Transmission System pipeline ("PNGTS") and from the gas fields near Sable Island
off Nova Scotia via the proposed Maritimes & Northeast pipeline ("M&N"), both of
which are currently under development. The FERC has issued certificates under
Section 7 of the Natural Gas Act authorizing construction of these pipelines.
Development of these pipelines is proceeding on schedule. PNGTS expects
commercial operation in December, 1998, and M&N expects commercial operation in
November, 1999.
Affiliates of New England Gas and EEC Enterprises will provide
administrative and consulting services to Maine GasCo.5 The services may
include, among other things: accounting, financial planning and analysis,
financial reporting, human resources, regulatory affairs, information systems,
insurance, legal, payroll, purchasing, tax, treasury, transportation, billing
support, telecommunications, meter installation and reading, real estate,
facilities management, call center services, engineering, construction and
environmental services, mapping, training, meter services and testing,
marketing, gas supply and control, gas transportation and general administrative
support.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Transaction, inclusive of legal fees and
expenses, are estimated at not more than $65,000.
Item 3. Applicable Statutory Provisions.
Sections 3(a)(1), 9(a)(2) and 10 of the Act apply to the Transaction.
Section 9(a)(2) of the Act makes it unlawful, without approval of the Commission
under Section 10, "for any person ... to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate ... of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." By virtue of the
Transaction, CMP Group will own, directly or indirectly, more than 5% of the
outstanding voting securities of five "public utility companies" -- CMP, MEPCo,
AVEC, NORVARCO and Maine GasCo (when it begins commercial operation) - thus
becoming an affiliate of CMP, MEPCo, AVEC, NORVARCO and Maine GasCo. Therefore,
Section 9(a)(2) requires approval by the Commission of the Transaction under
Section 10. The relevant standards under Section 10 are set forth in Sections
10(b), 10(c) and 10(f). In addition, CMP Group is currently an exempt public
utility holding company and New England Gas will be a public utility holding
company within the meaning of Section 2(a)(7) of the Act. New England Gas will
therefore be required to register unless it can qualify for an exemption.
Accordingly, CMP Group and New England Gas request an order under Section
3(a)(1) confirming CMP Group's exemption and granting an exemption to New
England Gas from all of the provisions of the Act (except Section 9(a)(2)
thereof).
For the reasons explained below, the Commission should grant approval
of the Transaction pursuant to Section 9(a)(2) of the Act based upon the
Transaction's compliance with the applicable standards of Section 10 of the Act.
In addition, for the reasons described below, the Commission should by order
confirm CMP Group's exemption and grant New England Gas an exemption, pursuant
to Section 3(a)(1), from all of the provisions of the Act (except for Section
9(a)(2) thereof). A. Approval of the Transaction under Section 9(a)(2)
As recognized in the comprehensive report issued by the Division of
Investment Management in June 1995 entitled "The Regulation of Public-Utility
Holding Companies" (the "Division Report"), the framers of the Act intended and
understood the need for the Act to be interpreted in a flexible manner to
account for changes in the utility industry over time. Commission decisions have
recognized the framers' intent. While the Applicants believe that the requested
authorization is well within existing Commission precedent, changes in the
utility industry make the case for the Transaction even more compelling. The
utility industry is evolving towards a broadly-based energy-related business. As
discussed below, the evolution of the utility industry dramatically affects the
appropriate notion of what a utility system consists of.
Sections 10(b), 10(c) and 10(f) of the Act set forth the standards for
approval of the Transaction. The Transaction satisfies all of the requirements
of Section 10 and should therefore be approved. Specifically, as the following
discussion more fully explains: o the Transaction will not tend towards
interlocking relations or the concentration of control of public utility
companies to the detriment of investors and consumers;
o the consideration, including all commissions and fees, to be paid in
connection with the Transaction is reasonable;
o the Transaction will not unduly complicate the capital structure of the
CMP Group holding company system;
o the Transaction is in the public interest and the interests of
consumers and investors;
o the Transaction will tend towards the development of an integrated gas
utility system; and
o the Transaction will comply with all applicable State laws.
1. Section 10(b)
a. Section 10(b)(1)
Section 10(b)(1) provides that, if the requirements of Section 10(f)
are satisfied, the Commission shall approve an acquisition unless:
(1) such acquisition will tend towards interlocking relations
or the concentration of control of public utility companies,
of a kind or to an extent detrimental to the public interest
or the interest of investors or consumers.
The Transaction will not tend towards interlocking relationships or the
concentration of control that would be detrimental to the public interest or the
interests of investors or consumers because (i) following consummation of the
Transaction, all of the public utilities in the CMP Group system, including
Maine GasCo, will remain subject to regulation by the MPUC, which operates
pursuant to regulations specifically designed to protect the public interest and
the interests of consumers, (ii) the addition of Maine GasCo, which will account
for a relatively small portion of CMP Group's income, to the CMP Group system
will not materially increase the size of the system, (iii) due to the nearly
total absence of cross elasticity of demand, as explained below, CMP and Maine
GasCo will have few occasions to compete directly and CMP will continue to
operate in a competitive market which will not change as a result of the
Transaction, (iv) since Maine GasCo was given non-exclusive authorization to
provide natural gas service in certain areas of Maine, there will be a
competitive gas market in such areas, and (iv) as a result of the Transaction,
the Applicants expect to achieve significant economies of scale and efficiencies
and expect to be able to compete more effectively in the evolving energy
marketplace, both of which will benefit consumers and ratepayers and are in the
public interest.
The formation and initial capitalization of Maine GasCo have been
approved by the MPUC. In addition, all of the operating utilities, including
Maine GasCo, will be subject to continuing regulation by the MPUC, which
functions to protect the interest of consumers and the public interest. Maine
GasCo will be subject to the jurisdiction of the MPUC with respect to rates and
other matters and the level of regulatory authority exercised by the MPUC over
CMP, MEPCo, AVEC and NORVARCO will not be affected by the Transaction. Thus, the
presence of continuing state regulation will help to ensure that the Transaction
will not have a detrimental effect on the public interest or consumers. In the
Division Report at p. 73-4, the Division of Investment Management recommended
that the Commission approach its analysis on merger and acquisition transactions
in a flexible manner with emphasis on whether the transaction creates an entity
subject to effective regulation and is beneficial for shareholders and
customers, as opposed to focusing on rigid, mechanical tests.
Section 10(b)(1) requires a finding that a transaction will not "tend
towards the concentration of control ... of a kind or to an extent detrimental
to the public interest or the interest of investors or consumers." The framers
of the Act sought through Section 10(b)(1) to avoid "an excess of concentration
and bigness" and "huge, complex and irrational holding company systems," while
preserving the "opportunities for economies of scale, the elimination of
duplicative facilities and activities, the sharing of production capacity and
reserves and generally more efficient operations" afforded by certain
combinations. American Electric Power Co., Inc., 46 S.E.C. 1299, 1307-1309
(1978). The Transaction will not create an "excess of concentration and bigness"
or a "huge, complex or irrational system" because the acquisition by CMP Group,
through New England Gas, of up to 50% of the voting securities of Maine GasCo,
which will own a small local gas distribution system, will not materially
increase the size of CMP Group. The Transaction is not detrimental to the public
interest or the interest of investors or consumers, but rather, as discussed in
more detail below, will afford Maine GasCo the opportunity to achieve the
economies of scale and efficiencies that the Act's framers intended to preserve
for the benefit of investors and consumers.
The Transaction will not have a detrimental effect on competition in
Maine. To the contrary, the Applicants believe that the Transaction will enhance
competition in the natural gas market in Maine. The Transaction will have no
effect on the competitive environments in which CMP Group's electric business
operates. Following the Transaction, CMP Group's electric business will face the
same competitive forces from other electric suppliers as prior to the
Transaction.6 Because CMP's competitive behavior is shaped by competition with
energy "peers," CMP Group's electric business and Maine GasCo will rarely engage
in direct competition and, in any event, the Transaction will have no adverse
effect on competition in a manner or to an extent detrimental to the public
interest or the interests of investors or consumers. In addition, since Maine
GasCo will provide natural gas service in areas not currently receiving natural
gas service on a non-exclusive basis, consumers will benefit from the existence
of competition among gas companies and by having more energy choices.
CMP Group's electric business will not compete directly with Maine
GasCo for several reasons. First, there is little substitution between gas and
electricity as energy sources in most industrial and commercial applications.
Generally, gas cannot be substituted for electricity on an instantaneous basis
because most industrial and commercial processes are energy-specific. Thermal
processes most often employ natural gas, while motor and machine driven
processes employ electricity. Where an industrial or commercial application
permits the use of either fuel, the substitution of one fuel for another
requires equipment investment and other expense that does not allow substitution
in response to relatively insignificant price changes. Most often, the choice of
fuel is dictated by numerous considerations in addition to fuel prices, such as
quality control, safety and environmental concerns. For residential users,
natural gas cannot be substituted for electricity in lighting, refrigeration,
and most household appliances. The amount of fuel used for residential cooking
is very small, and the choice of equipment tends to be dictated by personal
preference rather than by fuel price. Residential customers generally choose
fuel sources for heating based on many factors, including equipment prices,
reliability, service, the size of the home, perceptions of energy efficiency and
matters of comfort, convenience and aesthetics, and not solely based on relative
fuel price.
Second, there will be competition in the retail market for industrial
and commercial customers of natural gas in Maine because gas will be transported
in Maine on an open-access basis. There also will be competition between local
distribution companies and interstate pipelines, such as PNGTS and M&N, to serve
commercial and industrial load in Maine. Interstate pipelines and local
distribution companies (including Maine GasCo) presently are competing with one
another over the construction of laterals between the interstate pipeline and
the end-user, which are necessary in order to be able to serve certain
end-users. The natural gas transported over both the interstate pipelines and
the laterals will be transported to industrial and commercial customers on an
open-access basis. Such transportation effectively will permit retail
competition for these customers among pipelines, gas marketers, brokers and
producers, as well as the local distribution companies. These customers will be
able to purchase gas from many independent marketing companies which will
participate in the expanding spot market. Suppliers of natural gas in Maine must
also compete with other fossil fuels, including oil, propane, coal, and
petroleum coke, which can be employed in some of the thermal applications for
which natural gas is used.
Finally, electric and gas rates in Maine presently are regulated and
set by the MPUC. After March 1, 2000, the MPUC will regulate the distribution of
electric energy and, under Maine's open-access statute, generation will be
unregulated. The MPUC will continue to regulate bundled natural gas rates to
small residential customers and transportation rates to open-access customers.
Thus, ample regulatory authority exists to protect against any possible abuse,
including any discriminatory or anti-competitive behavior.
The Transaction is not undertaken for the purpose of extending CMP
Group's control over regulated public utilities and will not lead to the type of
concentration of control over utilities, unrelated to operating efficiencies,
that Section 10(b)(1) was intended to prevent. CMP Group's primary objective in
acquiring an interest in Maine GasCo is to position itself to participate,
through Maine GasCo, in the growing and increasingly deregulated New England
energy market and to provide natural gas service to areas in Maine that do not
currently receive natural gas service. As explained below, the Transaction will
combine the strengths of CMP and Maine GasCo which will enable them to offer
customers a broader array of energy products and services than either company
alone could offer, and at the same time create a larger and more diverse asset
and customer base, which will create opportunities for operating efficiencies.
By virtue of the Transaction, CMP and Maine GasCo will be in a position
to realize the "opportunities for economies of scale, the elimination of
duplicate facilities . . . and generally more efficient operation" described by
the Commission in American Electric Power Co., 46 SEC 1299, 1309 (1978). Among
other things, the Applicants expect the Transaction to create significant
operational and administrative economies and efficiencies in the areas of
accounting, financial planning and analysis, financial reporting, human
resources, regulatory affairs, information systems, insurance, legal, payroll,
purchasing, tax, training, treasury, transportation, billing support,
telecommunications, meter installation and reading, real estate, facilities
management, call center services, engineering, construction and environmental
services, and other administrative and general services. In addition, as a
result of the Transaction, CMP Group is expected to be better positioned to
remain competitive as the utility industry evolves. These factors should prove
beneficial to the interests of investors and consumers as well as the public
interest in general. Finally, the Manager will be located in Maine and Maine
GasCo will have its own local management team and work force. The only
management interlocks that may be created are only those which are necessary and
desirable in order to integrate Maine GasCo fully into CMP Group.
b. Section 10(b)(2)
Section 10(b)(2) provides that an acquisition should be approved
unless the price paid: is not reasonable or does not bear a
fair relation to the sums invested in or the earning capacity
of the utility assets to be acquired or the utility assets
underlying the securities to be acquired.
In its determinations as to whether or not a price meets such standard, the
Commission has considered whether the price was decided as the result of arm's
length negotiations,7 whether the purchaser's Board of Directors has approved
the purchase price,8 the opinions of investment bankers9 and the earnings,
dividends, and the book and market value of the shares of the company to be
acquired.10
In this case, CMP Group, through New England Gas, and EEC, through EEC
Enterprises, will each make initial capital contributions in proportion to their
respective ownership interests so that the total initial capital contribution
will equal $20 million. Since Maine GasCo is a newly formed, privately held
entity and, as part of the parties' efforts to minimize costs, no outside
investment bankers are involved in the Transaction, the Commission cannot look
to investment banker opinions or publicly traded stock information to review the
reasonableness of the price. However, the amounts to be invested were determined
as a result of arm's length negotiations based on an evaluation of what
facilities would be necessary to serve natural gas customers in Maine and were
reviewed by the respective Boards of Directors of each party to the Joint
Venture Agreement. Furthermore, these financing arrangements have been approved
by the MPUC. The MPUC can continue to monitor Maine GasCo's expenditures through
its ratemaking proceedings and regulation with regard to other matters. In
addition, each party's contribution is to be used to finance the construction
and start up of the Maine GasCo System and effectively amounts to a purchase
made at cost. In summary, the following factors all lead to the conclusion that
the amount to be invested by CMP Group is fair and does not warrant any of the
negative findings that call for disapproval under Section 10(b)(2) of the Act:
(i) the amount of the equity contributions to be made have been approved by the
MPUC as being in the public interest, (ii) these arrangements were negotiated
among the parties on an arm's length basis; and (iii) as discussed below, the
investment will constitute a very small portion of CMP Group's overall capital
investments.
c. Section 10(b)(3)
Section 10(b)(3) directs approval of an acquisition unless the
Commission finds that:
(3) such acquisition will unduly complicate the capital
structure of the holding company system of the applicant ...
or will be detrimental to ... the proper functioning of such
holding company system.
Section 10(b)(3) (along with Section 11(c)(1) discussed below) relates to the
corporate simplification standards of Section 11(b)(2), which require that each
registered holding company take the necessary steps
to ensure that the corporate or continued existence of any
company in the holding-company system does not unduly or
unnecessarily complicate the structure ...
of such holding-company system.
The intent of these requirements is to assure the financial soundness of the
holding company system, with a proper balance of debt and equity. No such
complexities will result from the Transaction. The Transaction will have a very
minimal impact on the capitalization and earnings of CMP Group. CMP Group's
investment in Maine GasCo, through New England Gas, will take the form of a
straightforward equity contribution which will not complicate CMP Group's
capital structure.
As set forth more fully in the discussion of the standards in Section
10(c)(2), below and elsewhere herein, the Transaction will create opportunities
for CMP and Maine GasCo to achieve significant economies of scale and
efficiencies, chiefly in the area of management expertise. CMP Group
subsidiaries may also provide services in connection with accounting, financial
planning and analysis, financial reporting, human resources, regulatory affairs,
information systems, insurance, legal, payroll, purchasing, tax, training,
treasury, transportation, billing support, telecommunications, meter
installation and reading, real estate, facilities management, call center
services, engineering, construction and environmental services and general
administrative support. In addition, since Maine GasCo will provide, on a
non-exclusive basis, natural gas service in areas not currently receiving
natural gas service, consumers will benefit from the existence of competition
among gas companies and by having more energy choices. The Transaction will
therefore be in the public interest and the interest of investors and consumers,
and will not be detrimental to the proper functioning of CMP Group's holding
company system. Moreover, as noted by the Commission in Entergy Corporation, et
al., 55 SEC Docket 2035 at 2045 (December 17, 1993), "concerns with respect to
investors' interests have been largely addressed by developments in the federal
securities laws and the securities markets themselves." CMP Group is a reporting
company subject to the continuous disclosure requirements of the Securities
Exchange Act of 1934 and will continue to be so following completion of the
Transaction, which will provide investors with readily available information
concerning CMP Group. Furthermore, the Transaction is subject to state
regulatory approvals, which have been obtained (see Item 4 - Regulatory
Approvals, below). For these reasons, the Applicants submit that the Commission
would have no basis for making a negative finding under Section 10(b)(3).
2. Section 10(c)
The relevant provisions of Section 10(c) of the Act state that the
Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any
other interest, which is unlawful under the provisions of section 8 or
is detrimental to the carrying out of the provisions of section 11; or
(2) the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public
utility system.
The Applicants respectfully submit that the requirements of Section 10(c) are
satisfied.
a. Section 10(c)(1)
Section 10(c)(1) requires that the proposed acquisition not be
"unlawful under the provisions of Section 8" or "detrimental to the carrying out
of the provisions of Section 11." Section 8, by its terms, only applies to
registered holding companies and thus, the Transaction could not be unlawful
under Section 8 because, after consummation of the Transaction, CMP Group will
continue to be an exempt public utility holding company. However, even if
Section 8 were applied to exempt holding companies, the Transaction would not be
unlawful since there is no state law, regulation or policy against combination
gas and electric companies and the MPUC has specifically authorized CMP Group to
provide, through Maine GasCo, natural gas service on a non-exclusive basis in
certain areas of Maine.
Section 10(c) also requires that such acquisition not be detrimental to
the carrying out of the provisions of Section 11. Section 11 of the Act relates
to the simplification of holding company systems. Section 11(b)(1) sets forth
the principal elements of Section 11's simplification standard. It specifically
mandates that the Commission require each registered holding company to limit
the operations of the holding company system to a single integrated public
utility system. Section 11(b)(1) also provides for the acquisition and retention
of more than one integrated system only if the requirements of Section
11(b)(1)(A)-(C) ("ABC clauses") are satisfied. By its terms, however, Section
11(b)(1) applies only to registered holding companies. However, the Commission
has previously determined that a holding company may acquire utility assets that
will not, when combined with the acquiring company's existing utility assets,
make up an integrated system or comply fully with the ABC clauses, provided that
there is de facto integration of contiguous utility properties and the holding
company will be exempt from registration under Section 3 of the Act following
the acquisition. See, e.g., BL Holding Corp., Holding Co. Act Release No. 26875
(May 15, 1998); TUC Holding Company, et al., Holding Co. Act Release No. 26749
(August 1, 1997). CMP Group's utility operations will be located substantially
in the same geographic region within Maine and will be integrated to the extent
that there will be a significant degree of centralized planning within the CMP
Group holding company system, as discussed in more detail below. Moreover, CMP
Group will be an exempt holding company and Maine GasCo will be locally managed.
Despite the believed inapplicability of Section 11, the Transaction
does, in any event, meet the conditions of Section 11(b)(1). Specifically,
following consummation of the Transaction, the CMP Group system will consist of
a large integrated electric utility system and a smaller integrated gas utility
system which together will operate on a coordinated basis offering services to
customers in substantially the same area in the State of Maine (see Exhibit E-1
hereto for maps depicting the service territories of CMP and of Maine GasCo).
The entire CMP Group system will be operated as a single coordinated system to
the extent that there will be a significant degree of centralized planning
(including accounting, financial planning and analysis, financial reporting,
human resources, regulatory affairs, information systems, insurance, legal,
payroll, purchasing, tax, training, treasury, transportation, billing support,
telecommunications, meter installation and reading, real estate, facilities
management, call center services, engineering, construction and environmental
services and general administrative services provided by CMP Group
subsidiaries). In addition, the MPUC has approved the formation of New England
Gas and Maine GasCo and the initial capitalization of Maine GasCo and has
authorized CMP Group, through Maine GasCo, to provide on a non-exclusive basis
natural gas service in certain areas of Maine and Maine GasCo will be subject to
MPUC regulation with regard to rates and other matters. Thus, the Transaction
will not give rise to any of the abuses, such as ownership of scattered utility
properties, inefficient operations, lack of local management or evasion of state
regulation, that Section 11(b)(1), and the Act generally, were intended to
address.
Furthermore, the term "integrated public-utility system" is defined in
Section 2(a)(29) in the context of an electric company and in the context of a
gas company. Section 2(a)(29) states:
As applied to electric utility companies, a system consisting
of one or more units of generating plants and/or distributing
facilities, whose utility companies are physically
interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as
a single interconnected and coordinated system confined in its
operations to a single area or region, in one or more states,
not so large as to impair (considering the state of the art
and the area or region affected) the advantage of localized
management, efficient operation, and the effectiveness of
regulation;
and
As applied to gas utility companies, a system consisting of
one or more gas utility companies which are so located and
related that substantial economies may be effectuated by being
operated as a single coordinated system confined in its
operations to a single area or region, in one or more states,
not so large as to impair (considering the state of the art
and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of
regulation: Provided, that gas utility companies deriving
natural gas from a common source of supply may be deemed to be
included in a single area or region.
First, it should be noted that the Act does not contain a definition of
integrated public utility system in the context of a combination gas and
electric company and the Act does not specifically prohibit ownership by an
exempt holding company of both electric and gas utility properties.11 Second,
existing Commission precedent demonstrates that Section 10(c)(1) does not
require that the resulting exempt holding company constitute "a single
integrated system." In In the Matter of Gaz Metropolitain et al., Holding Co.
Act Release No. 26170 (Nov. 23, 1994), the Commission considered and approved a
Section 10 application where the resulting exempt holding company would own two
gas utilities which would not constitute a single integrated system within the
meaning of the Act.12 In issuing this order, the Commission stated that Section
10(c)(1) does not mandate that Section 11's integration requirement be met. The
Commission stated that exempt holding companies are not directly subject to
Section 11(b)(1)'s integration standards, and also indicated that acquisitions
may be approved even if the combined system will not be a single integrated
system.13 Thus, subject to certain conditions discussed below, it is consistent
with the Act for the Commission to approve an application under Section 10 where
the resulting exempt holding company system contains both an integrated electric
system and an integrated gas system.
Section 10 does, however, require that the transaction, and the
resulting holding company system, be consistent with the basic principles of
Section 11 of the Act, which is often referred to as the "heart" of the Act.
Thus, the primary issue with respect to the Transaction is whether, under
Section 10(c), the creation of an exempt holding company system as a result of
the acquisition by an electric system of a gas system is detrimental to the
carrying out of the provisions of Section 11 and not whether it complies
strictly with the integration standards of Section 11. In analyzing whether or
not a transaction would be detrimental to the carrying out of the provisions of
Section 11, it is important to focus on the purpose of Section 11, which
according to legislative history, is to:
Break-down dangerous and unnecessary nation-wide financing
interlockings in the essentially local operating utility
business, ... to reduce utility enterprises to a size and
power which can be successfully regulated by local and Federal
regulatory commissions, ... to confine the operations and the
interest of each public utility system to the actual utility
business of a given region.14
This overarching concern of the Act clearly focuses on the need to concentrate
the geographic scope of the system to a reasonable geographic area (as
determined by a variety of factors, including technological developments) to
ensure that management will be sensitive and accountable to a given region, that
there will be adequate local regulation of the holding company system and that
the holding company structure is beneficial to the operating utilities. Thus, a
transaction is not detrimental to the provisions and policies of Section 11
where the resulting system will be an exempt holding company and the applicants
can demonstrate that adequate regulatory authority exists to protect local
ratepayers, that the resulting system is a coherent system and not one where
great and irrational distances divide the operating utilities, and there are
benefits to be gained by at least one of the operating utilities as a result of
the transaction. Indeed, in the Gaz Metropolitain case, the Commission
specifically noted that the two systems were in a geographically concentrated
area, that the Vermont regulators had expressed their belief that they could
protect the public interest in Vermont after the consummation of the transaction
and that the Vermont gas system had experienced and could be expected to
continue to experience significant savings as a result of its association with
the holding company system. As discussed below, following consummation of the
Transaction, CMP Group will meet all of the above criteria in a similar manner.
The Commission has taken the position, since 1974, that combination gas
and electric exempt holding companies are consistent with the requirements and
policies of the Act and are not detrimental to Section 11. See Union Electric
Company, 45 SEC 489 (1974). In addition, in 1988, the Commission decided two
important cases in this area, Dominion Resources, Inc., Holding Co. Act Release
No. 24618 (April 5, 1988) and WPL Holdings, Inc. , Holding Co. Act Release No.
24590 (February 26, 1988). In Dominion Resources, a combination gas and electric
holding company was permitted to acquire a gas utility. Pursuant to Section 10,
the Commission expressly held that "the provisions of Section 11 are not
applicable to exempt holding companies such as [Dominion Resources.]" The
Commission went on to find not merely that Section 11 by its terms applies only
to registered holding companies, but that such an acquisition did not violate
Section 10(c) of the Act. Moreover, since Dominion Resources did not acquire any
new electric properties, there was no direct effect upon its electric system, as
is also the case in the proposed Transaction. Similarly, in WPL Holdings the
Commission stated that the "pro-competitive thrust of the Act" did not express
an absolute Federal policy against combination gas and electric operations.
More recently, in TUC Holding Company et al., supra and BL Holding
Corp., supra, the Commission granted exemptions and authorized transactions
pursuant to which, in the case of TUC Holding Company, an entity providing
electric service in a given area acquired an entity providing gas service in
substantially the same area, and, in the case of BL Holding Corp., an entity
providing gas service in a given area acquired an entity providing electric and
gas service in an adjacent area. In granting the exemptions and authorizing the
transactions, the Commission noted that there would be de facto integration of
the combined utility properties, that the systems would be coordinated
administratively, that the transactions would not give rise to any of the abuses
that Section 11(b) was intended to address, and that the transactions would have
no effect on the ability of regulatory authorities to carry out their duties,
all of which are true with respect to the proposed Transaction.
Furthermore, subsequent to 1974, and especially since 1988, the
Commission has issued a number of orders authorizing the creation and/or
continued exemption of new or larger combination gas and electric exempt holding
company systems, whether through the formation of a new holding company15 or via
the acquisition of a gas and/or electric company by an existing combination gas
and electric system.16 Throughout this period, the Commission's decisions have
focused on whether "both the electric and gas operations that [the holding
company] proposes to acquire constitute an integrated public-utility system,"17
consistent with the analysis which should be applied in the present case. In
other words, while the policies and basic protections underlying Section 11
(i.e., deference to state regulatory authority with respect to combination
companies, provided the resulting holding company system in any case will not be
the type of holding company system which the Act was designed to prevent) apply
to exempt holding company acquisitions, a strict reading of Section 11 is not
required.
Another factor that must be included in any Section 10 and Section 11
analysis is current utility industry conditions. As the Commission noted in its
Union Electric Company decision, the courts have attached "great weight ... to
[the Commission's] expertise in the administration of the Act."18 The Commission
historically has applied its expertise in administering the Act, taking into
account changes in legal, regulatory and economic circumstances, including
market and regulatory changes. As the Division of Investment Management noted in
the Division Report, "the SEC must continue to respond flexibly to the
legislative, regulatory and technological changes that are transforming the
structure and shape of the utility industry,"19 especially since "Section 11
does not impose `rigid concepts' but rather creates a `flexible' standard
designed to accommodate changes in the electric utility industry."20
Such concerns have influenced Commission decisions under the Act, and
under Section 10 in particular, in the past.21 Utility companies, exempt holding
companies, registered holding companies and related entities are presently in
the midst of, or have completed, restructurings or major transactions designed
to permit them to become complete energy services companies, offering customers
across the nation an array of fuels to meet their complete energy needs through
a "one-stop" energy company, an industry shift that the Commission has expressly
recognized. Recently the following companies have entered into, or announced,
strategic transactions: Portland General Corporation, an electric utility
holding company and Enron Corporation, a large gas pipeline and electric and gas
marketer; NorAm Energy, Inc., a gas utility company, and Houston Industries,
Inc., an electric utility holding company; Pacific Enterprises, a gas utility
holding company and Enova Corp., a combination holding company with primary
emphasis on electric operations; PanEnergy Corp., a large pipeline company and
Duke Power Company, an electric utility and an electric utility holding company;
and KeySpan Energy Corporation, a gas utility holding company and Long Island
Lighting Company, an electric utility. All of these transactions demonstrate
that market forces are pushing for the convergence of electric and gas
operations in one corporate entity; namely, a full service utility company.
Thus, the traditional model of a vertically integrated gas or electric utility
company is becoming obsolete and evidence continues to mount that the model
utility company of the near future will be the one-stop energy company. Evidence
of this trend in Maine is the restructuring bill, discussed above, that was
signed into law by the Governor of Maine on May 29, 1997, which is intended to
promote competition and a movement to a free market in Maine.
Taking this industry evolution into account, it becomes clear that the
Transaction will provide CMP Group with an efficient basis for entering into the
natural gas business and provide Maine GasCo with greater financial and other
resources, allowing the CMP Group system of utilities to remain competitive with
the emerging one-stop energy services companies. CMP Group anticipates that it
will be able to offer its customers a choice of fuels (gas and/or electricity)
to meet their energy needs at competitive prices in the most economical and
efficient manner.
It is clear that the Transaction will result in a combined system that
will not be detrimental to the carrying out of Section 11. The electric utility
system of CMP (including MEPCo, AVEC and NORVARCO) is presently "integrated"
within the meaning of Section 2(a)(29) of the Act and will remain so after the
Transaction. The Transaction will not affect the physical interconnection of
such electric utility system. Similarly, the area of operations of such system
will not be affected by the Transaction and will continue to be confined to a
single area in Maine that is not so large as to impair the advantages of
continuing localized management, efficient operation and effective regulation.
The entire CMP Group system will be operated as a single coordinated system to
the extent that there will be a significant degree of centralized planning
(including accounting, financial planning and analysis, financial reporting,
human resources, regulatory affairs, information systems, insurance, legal,
payroll, purchasing, tax, training, treasury, transportation, billing support,
telecommunications, meter installation and reading, real estate, facilities
management, call center services, engineering, construction and environmental
services and general administrative services provided by CMP Group
subsidiaries). Thus, following consummation of the Transaction, the CMP Group
system will consist of a large integrated electric utility system and a smaller
integrated gas utility system which together will operate on a coordinated basis
offering services to customers in substantially the same area in the State of
Maine (see Exhibit E-1 hereto for maps depicting the service territories of CMP
and of Maine GasCo).
It is also clear that the Transaction will not be detrimental to the
carrying out of the provisions of Section 11 inasmuch as CMP Group will carry
out its utility operations within the State of Maine, and its utility operations
will be subject to adequate regulatory authority in Maine and will not be the
type of nationwide, complex system that Section 11 was designed to prevent.
Moreover, CMP Group will be an exempt holding company and exempt holding
companies have generally been permitted to retain or acquire combination systems
so long as combined ownership of gas and electric operations is permitted by
state law and is supported by the interested regulatory authorities. Maine law
does not prohibit combination gas and electric utility companies, and the MPUC
has specifically authorized the Transaction. The fact that CMP Group will be an
exempt holding company and the Transaction is subject to the Act's less
restrictive standard with regard to electric and gas combinations, taken
together with the facts that CMP Group's utility operations will be located in
substantially the same geographic region within Maine, and that the MPUC has
approved the formation of New England Gas and Maine GasCo and the initial
capital contribution to Maine GasCo and has authorized CMP Group, through Maine
GasCo, to provide on a non-exclusive basis natural gas service in certain areas
of Maine, all lead to the conclusion that the Transaction should be authorized
under the Act.
b. Section 10(c)(2)
Section 10(c)(2) requires that an acquisition not be approved unless
the Commission finds that: [S]uch acquisition will serve the
public interest by tending towards the economical and
efficient development of an integrated public-utility system.
The Commission has stated on numerous occasions, that under Section
10(c)(2) an exempt holding company may consist of more than one integrated
system.22 In essence, Section 10(c)(2) requires that (i) each utility system
within the exempt holding company system be an integrated system and (ii) the
acquisition tend toward the economical and efficient development of an
integrated system. The economies and efficiencies expected to accrue to the
Maine GasCo and CMP Group systems as a result of the Transaction are sufficient
to satisfy the standards of Section 10(c)(2). The Commission has noted that
economies and efficiencies that cannot be quantified should be taken into
account in this analysis, as "specific dollar forecasts of future savings are
not necessarily required; a demonstrated potential for economies will suffice
even when these are not precisely quantifiable."23
The parties continue to identify areas of operations which could be the
source of potential economies of scale and efficiencies. It is currently
expected that economies and efficiencies will result largely from the fact that
the service territories of CMP and Maine GasCo will overlap and therefore CMP
Group's utility system will be able to streamline many operations when it
functions as a single system, such as: (i) meter installation and reading
operations; (ii) information systems and telecommunications; (iii) billing
support; and (iv) customer call center operations. The Applicants also expect
significant administrative economies and efficiencies to result from the
provision by CMP Group's subsidiaries of corporate services, such as accounting,
financial planning and analysis, financial reporting, human resources,
regulatory affairs, insurance, legal, payroll, purchasing, tax, training,
treasury, transportation, real estate, facilities management and engineering,
construction and environmental services.
These economies of scale and efficiencies will result from the
Applicants' provision of services on a coordinated basis that the evolving
energy marketplace demands, and are consistent with the economies of scale and
efficiencies that the Commission has found sufficient in connection with other
applications under Section 10(c)(2) of the Act. For example, in WPL Holdings,
supra, the Commission focused on benefits that would result from:
a structure that could more efficiently address the growing
national competition in the energy industry, refocus various
utility activities, facilitate selective diversification into
non-utility businesses, ... and provide additional flexibility
for financing.
The CMP Group system will also meet the requirement that it be "not so
large as to impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation and the
effectiveness of regulation." In In the Matter of American Natural Gas Company,
Holding Co. Act Release No. 15620 (Dec. 12, 1966), the Commission found that the
American Natural Gas system would meet the above requirement after its
acquisition of an Indiana gas utility:
Although American Natural will provide certain central
facilities, equipment and personnel ... Central Indiana will
retain its own local management and board of directors, a
majority of whom will be residents of Indiana. Central Indiana
will continue to be subject to regulation by the Public
Service Commission of Indiana.
Maine GasCo will be operated in a similar manner. While, as discussed above,
Maine GasCo may receive a number of centralized services from CMP Group
subsidiaries allowing it to capture economies and efficiencies for the Maine
GasCo System, the Maine GasCo System will be operated on a day-to-day basis by a
local operator (Maine GasCo), and the Maine GasCo System will be regulated by
the MPUC with regard to rates and other matters. Thus, the Maine GasCo System
will be locally operated and locally regulated, but will have the economic
advantage of certain centralized services.
3. Section 10(f) Section 10(f) provides that:
The Commission shall not approve any acquisition ... under
this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect of
such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section
11.
As explained below in Item 4 - Regulatory Approvals, certain aspects of
the Transaction require approval of the MPUC. The MPUC has authorized CMP Group,
through Maine GasCo, to provide on a non-exclusive basis natural gas service in
certain areas in Maine, and has approved the formation and initial
capitalization of Maine GasCo. Copies of such orders are attached hereto as
Exhibits D-1 and D-2, respectively. B. The Exemption under Section 3(a)(1)
As demonstrated below, CMP Group and New England Gas respectfully
submit that the Commission should confirm CMP Group's status as an exempt public
utility holding company under Section 3(a)(1) of the Act and that New England
Gas should be granted an exemption under Section 3(a)(1) of the Act. Section
3(a)(1) of the Act exempts a "holding company" from all of the provisions of the
Act (except for Section 9(a)(2) thereof) if:
such holding company, and every subsidiary company thereof
which is a public-utility company from which such holding
company derives, directly or indirectly, any material part of
its income, are predominately intrastate in character and
carry on their business substantially in a single State in
which such holding company and every such subsidiary company
thereof are organized.
CMP Group and New England Gas will satisfy such requirements. The public utility
subsidiaries of CMP Group and New England Gas will be predominantly intrastate
in character and will carry on their business substantially in Maine, the state
in which they are all organized. Of $954,176,000 in total revenues from CMP
Group's electric operations in 1997, $929,610,000, or 97%, was derived from
sources in Maine, while only $24,566,000, or 3%, were from operations outside of
Maine, principally electric energy sold at wholesale outside of Maine or at the
state line. Additionally, of the $1,040,492,000 in net utility assets (net
electric plant in service) in 1997, $971,809,000 or 93%, were Maine assets,
while the remaining $68,683,000, or 7%, were Connecticut assets associated with
the Millstone No. 3 plant. The indirect acquisition and ownership of Maine GasCo
voting securities by CMP Group will have no impact on the continuing entitlement
of CMP to its exemption under Section 3(a)(1) of the Act since CMP will remain a
holding company because of its continued ownership of MEPCo, AVEC and NORVARCO.
Section 3(a) of the Act provides that, if an applicant satisfies the
objective requirements for an exemption, the applicant shall be granted the
exemption, "unless and except insofar as [the Commission] finds the exemption
detrimental to the public interest or the interest of investors or consumers."
In assessing whether a proposed exemption is "detrimental," the Commission has
focused upon the presence of state regulation, establishing that federal
intervention is unnecessary when state control is adequate. See, e.g., KU Energy
Corp., Holding Co. Act Release No. 25409 ( Nov. 13, 1991); CIPSCO Inc., Holding
Co. Act Release No. 25152 (Sept. 18, 1990).24
The Commission should find that sufficient safeguards exist under state
law to ensure that no potential adverse consequences would result from the
Transaction. As discussed above, the MPUC has approved the formation and initial
capitalization of Maine GasCo and the MPUC will regulate Maine GasCo with regard
to rates and other matters. In addition, as discussed above, CMP, MEPCo, AVEC
and NORVARCO will continue to be regulated under the laws of the State of Maine
and will continue to be subject to FERC jurisdiction.
Item 4. Regulatory Approvals.
The formation of Maine GasCo and the construction and financing of
Maine GasCo's natural gas distribution system are subject to the jurisdiction of
the MPUC. The MPUC has issued orders authorizing CMP Group to provide natural
gas service on a non-exclusive basis,25 through Maine GasCo, in certain areas of
Maine not currently receiving natural gas service and has also authorized the
formation and initial capitalization of Maine GasCo. Copies of such orders are
attached hereto as Exhibits D-1 and D-2, respectively.
No other state or federal commission has jurisdiction over the
Transaction.
Item 5. Procedure.
The Applicants hereby request that the Commission publish a notice
under Rule 23 with respect to the filing of this Application as soon as
practicable and that the Commission's order be issued as soon as possible in
order that Maine GasCo can begin serving Maine customers in December, 1998. A
form of notice suitable for publication in the Federal Register is attached
hereto as Exhibit H-1.
The Applicants do not believe that there should be a recommended
decision by a hearing officer or any other responsible officer of the Commission
or that there should be a 30-day waiting period between the issuance of the
Commission's order and the date on which it is to become effective. The
Applicants request that the Commission's order become effective immediately upon
the entry thereof. The Applicants consent to the Division of Investment
Management assisting in the preparation of the Commission's decision or order in
this matter, unless such Division opposes this application.
Item 6. Exhibits and Financial Statements.
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NO. DESCRIPTION METHOD OF FILING
(a) Exhibits
A-1 Articles of Organization of Maine GasCo. Filed herewith.
B-1 Joint Venture Agreement dated as of November Filed herewith.
12, 1997 between Central Maine Power
Company ("CMP") and New York State Electric
& Gas Corporation.
D-1 Order of the MPUC in Docket No. 96-786 Filed herewith.
authorizing CMP Group to furnish through
Maine GasCo, natural gas service in
certain areas of Maine.
D-2 Order of the MPUC in Docket No. 98-077 Filed herewith.
authorizing the formation and capitalization
of Maine GasCo.
E-1 Maps of service territory of CMP and Filed herewith.
natural gas service area of Maine GasCo. (paper format filing)
F-1 Preliminary opinion of Huber Lawrence & To be filed by amendment.
Abell, special counsel to CMP Group, Inc.
and New England Gas Development Corporation.
F-2 Past-tense opinion of Huber Lawrence & To be filed by amendment.
Abell, special counsel to CMP Group, Inc.
and New England Gas Development Corporation.
H-1 Proposed form of Federal Register Notice. Filed herewith.
(b) Financial Statements
1.1 Balance sheet of CMP Incorporated herein by reference to
(consolidated) as of June 30, 1998. Form 10-Q for the quarter ended
June 30, 1998 filed by CMP
File No. 1-5139.
1.2 Statement of Income and Retained Incorporated herein by reference to
Earnings of CMP (consolidated) Form 10-Q for the quarter ended
as of June 30, 1998. June 30, 1998 filed by CMP
File No. 1-5139.
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Item 7. Information as to Environmental Effects.
The Applicants do not believe that the Transaction would involve a
"Major federal action" nor would it "significantly affect the quality of the
human environment" as those terms are used in Section 102(2)(c) of the National
Environmental Policy Act. The only federal actions related to the Transaction
pertain to the Commission's approval of this application and confirmation and
granting of the exemptions requested herein. The Transaction would not result in
changes in the operations of CMP Group that would have any impact on the
environment. No Federal agency has prepared or is preparing an environmental
impact statement with respect to the Transaction.
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned companies have duly caused this statement to be signed
on their behalf by the undersigned thereunto duly authorized.
CMP Group, Inc.
Date: September 29, 1998 By: /s/ Anne M. Pare
----------------
Anne M. Pare
Treasurer, Corporate Counsel
and Secretary
New England Gas Development Corporation
Date: September 29, 1998 By: /s/ Arthur W. Adelberg
----------------------
Arthur W. Adelberg
President
APPENDIX A
PROPOSED SERVICE AREAS
Rumford
Hampden
Bath
Mexico
Orrington
Freeport
Dixfield
Bucksport
Yarmouth
Bethel
Clinton
North Yarmouth
Farmington
Waterville
Baileyville
(Woodland)
Wilton
Winslow
Bridgton
Jay
Fairfield
Casco
Livermore
Madison
Durham
Livermore Falls
Oakland
Gray
Millinocket
Skowhegan
Harrison
East Millinocket
Norridgewock
Naples
Medway
Augusta
Norway
Lincoln
Gardiner
Otisfield
Howland
Randolph
Oxford
Orono
Hallowell
Paris
Old Town
Farmingdale
Pownal
Milford
Manchester
Raymond
Veazie
Winthrop
Standish
Bangor
Topsham
Windham
Brewer
Brunswick
1 EEC is filing a contemporaneous application on Form U-1 in connection
with the Transaction.
2 As discussed below, CMP has agreed to sell its interest in AVEC in
connection with the sale of its generating assets. If AVEC is sold
prior to consummation of the Transaction, CMP Group would be an
affiliate of four public utility companies and would still require
9(a)(2) approval in connection with the Transaction.
3 On January 6, 1998, CMP announced that it had reached agreement to sell
substantially all of its hydro, fossil and biomass generating assets
with a combined generating capacity of 1,185 megawatts, and certain
other assets, to an affiliate of Florida-based FPL Group, the winning
bidder in the auction process. CMP's interests in the power
entitlements from approximately 50 purchased-power agreements with
non-utility generators representing approximately 488 megawatts and its
interests in the five nuclear generating facilities described below are
not included in the sale. The sale is subject to various closing
conditions, including the approval of state and federal regulatory
agencies.
4 MEPCo is a public utility organized in 1966, in which Bangor
Hydro-Electric Company ("Bangor Hydro") and Maine Public Service
Company hold the remaining voting stock. MEPCo owns and operates a
345-kV transmission interconnection between Wiscasset, Maine and the
Maine-New Brunswick international border at Orient, Maine, where its
line connects with the portion of the interconnection constructed in
the province of New Brunswick, Canada, by New Brunswick Power
Corporation ("New Brunswick Power"). MEPCo also owns and operates
certain equipment, including microwave communication facilities, in
connection with the Hydro-Quebec Phase II ("Phase II") project
described below.
AVEC owns and operates a 31-MW wood-fired generating plant in Fort
Fairfield, Maine, the output of which is sold to CMP.
NORVARCO is one of two general partners with 50 percent interests in
Chester SVC Partnership ("Chester"), a Maine general partnership which
owns a static var compensator facility (the "SVC Facility") located in
Chester, Maine, adjacent to MEPCo's 345-kV transmission interconnection
with New Brunswick, Canada. Chester's sole business is to own and,
through operating agreements with other entities, operate the SVC
Facility. Its two partners, each with a 50% interest, are NORVARCO and
Bangor VAR Co., a wholly-owned subsidiary of Bangor Hydro. Under the
partnership agreement, NORVARCO is the managing partner, with
responsibility for directing MEPCo's operation and maintenance of the
SVC Facility.
CMP's non-utility subsidiaries are as follows:
Central Securities Corporation and Cumberland Securities Corporation
both own real estate located in CMP's service area.
Kennebec Hydro Resources, Inc. ("Kennebec Hydro") is the general
partner with a 50 percent interest in The Merimil Limited Partnership
(the limited partners of which are not affiliates of CMP), which owns
the Lockwood Hydroelectric Project, a qualifying facility located in
Waterville, Maine.
Kennebec Water Power Company ("Kennebec Water"), in which CMP owns a
24.8% equity interest, operates a business regulating the flow of the
Kennebec River and owns storage dams at the East and West Outlets of
Moosehead Lake in Maine.
The Gulf Island Pond Oxygenation Project ("GIPOP") a Maine general
partnership in which CMP owns a 14% partnership interest (the other
three partners of which are paper companies), owns an oxygenation
facility at Gulf Island Pond on the Androscoggin River at Greene,
Maine, which is operated by Union Water under an operating agreement
with GIPOP.
As part of its agreement to sell substantially all of its generating
assets to an affiliate of FPL Group, CMP has agreed to sell its
interests in AVEC, Kennebec Hydro, Kennebec Water and GIPOP.
5 The provision of any services by CMP or any other CMP Group subsidiary
will be done in accordance with MPUC approved affiliate transaction
procedures. Allocations of cost will be done pursuant to MPUC approved
cost allocation guidelines. It is currently contemplated that the
provision of services to Maine GasCo by CMP will be pursuant to a
master services agreement which will conform to MPUC rules and
guidelines.
6 On May 29, 1997, the Governor of Maine signed into law a bill enacted
by the Maine Legislature that will restructure the electric utility
industry in Maine by March 1, 2000. The purpose of the restructuring
bill is to promote competition and a movement to a free market in
Maine. The principal restructuring provisions of the legislation
provide for customers to have direct retail access to generation
services and for deregulation of competitive electricity providers,
commencing March 1, 2000, with transmission and distribution companies
continuing to be regulated by the MPUC. By that date, vertically
integrated investor-owned utilities, such as CMP, are required to
divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator
contracts with qualifying facilities and contracts with demand-side
management or conservation providers, brokers or hosts; and (2)
ownership interests in nuclear power facilities. The bill also requires
investor-owned utilities, after February 29, 2000, to sell their rights
to the capacity and energy from the purchased-power contracts that had
not been divested pursuant to the legislation, with certain minor
exceptions. As noted above, CMP has entered into an agreement to divest
certain of its generation assets.
7 In the Matter of American Natural Gas Company, Holding Co. Act Release
No. 15620 (Dec. 12, 1966).
8 Consolidated Natural Gas Company, Holding Co. Act Release No. 25040
(Feb. 14, 1990).
9 Id.
10 In the Matter of Northeast Utilities, Holding Co. Act Release No. 15448
(April 13, 1966).
11 Union Electric Company, 45 SEC 489 (1974) ("Nowhere does the Act ban
combination systems in so many words.")
12 The definition of integrated system with respect to a gas utility
requires that the system be located in one or more states (defined as a
state of the United States) and, in this case, one of the utilities in
the system was located in Canada. Therefore, although integrated, the
system would arguably not be a single integrated system.
13 Citing Union Electric Company, 45 SEC 489 (1974) at 495, n. 20; Eastern
Gas and Fuel Associates, 30 SEC 834, 848(1950).
14 S. Rep. No. 651, 74th Cong., 1st Sess. 22 (1935).
15 See e.g., CIPSCO Incorporated, Holding Co. Act Release No. 25152,
(Sept. 18, 1990) (authorizing acquisition and granting exemption for
the formation of new holding company over existing combination gas and
electric utility and electric utility); Illinova Corporation, Holding
Co. Act Release No. 26054 (May 18, 1994) (authorizing formation of
holding company and granting exemption for holding company over
existing combination gas and electric utility); WPS Resources
Corporation, Holding Co. Act Release No. 26101 (Aug. 10, 1994)
(authorizing formation and exemption for holding company over existing
combination gas and electric and electric utilities); SIGCORP, Inc.,
Holding Co. Act Release No. 26431 (Dec. 14, 1995) (authorizing
formation and granting exemption for holding company over existing
combination gas and electric utility and two gas utilities); Energy
East Corporation, Holding Co. Act Release No. 26834 (March 4, 1998)
(authorizing formation of holding company and granting exemption for
holding company over existing combination gas and electric utility).
16 See e.g., IE Industries, Inc. Holding Co. Act Release No. 25325 (June
3, 1991) (authorizing acquisition of large electric utility by a
holding company with a combination gas and electric utility
subsidiary); NIPSCO Industries, Inc., Holding Co. Act Release No.
25470 (Feb. 2, 1992) (authorizing acquisition of gas utility by
holding company with existing combination gas and electric utility
subsidiary); NIPSCO Industries, Inc. Holding Co. Act Release No. 25766
(March 25, 1993) (authorizing acquisition of gas utility by holding
company with existing combination gas and electric and gas utility
subsidiaries); Southern Indiana Gas and Electric Company, Holding Co.
Act Release No. 26075 (June 30, 1994) (authorizing acquisition of gas
utility by combination gas and electric utility company with a gas
utility subsidiary).
17 CIPSCO Incorporated, Holding Co. Act Release No. 25152 (Sept. 18,1990).
18 Union Electric Company, 45 SEC at 509 n. 77.
19 Division Report at 70.
20 Division Report at 75.
21 See Union Electric Company, 45 SEC 489 (1974); UNITIL Corp., Holding
Co. Act Release No. 25524 (Apr. 24, 1992), and Mississippi Valley
Generating Co., 36 SEC 159 (1955).
22 The United Gas Improvement Company, 9 SEC 52 (1941), Union Electric
Company, 45 SEC 489 (1974) and In the Matter of Gaz Metropolitain et
al., Holding Co. Act Release No. 26170 (November 23, 1994). In Gaz
Metropolitain, the Commission stated "[W]e have indicated in the past
that acquisitions may be approved even if the combined system will not
be a single integrated system. Section 10(c)(2) requires only that the
acquisition tend "towards the economical and the efficient development
of an integrated public-utility system" (emphasis added.)"
23 Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29,
1986).
24 Furthermore, the Commission Staff has stated its support for greater
flexibility in the administration of existing exemptions in
consultation and cooperation with state regulators. See, Division of
Investment Management, The Regulation of Public Utility Holding
Companies, supra, at 119-20.
25 In authorizing CMP Group, through Maine GasCo, to provide natural gas
service on a non-exclusive basis, the MPUC noted at page 5 of its order
in Docket No. 96-786:
"[A]s a general matter, authorizing more than one LDC to serve
an area will result in beneficial competition to obtain
adequate customer load to build and serve an area in a manner
that may very likely "grow the market" so that system
expansion may ultimately be greater than it would be if only a
single entity was authorized to serve. Nor do we expect that
market inefficiencies, such as uneconomic duplication of
facilities and lost economies of scale, will predominate or
necessarily result in higher prices to end-users. We expect
that the efficiencies and product diversification that are the
hallmarks of competition will result in system expansion that
is at least as socially beneficial as that which could be
achieved by traditional means as a regulated monopoly service.
Moreover, we do not believe that, if customers are the
selecting mechanism, benefits would accrue to only the largest
customers to the detriment of smaller customers. Beneficial
deals and discounts to large customers may make it more
imperative for the entity to obtain additional small customers
in order to increase throughput and achieve an adequate return
on infrastructure development. Consequently, competition among
providers could ultimately drive deeper penetration levels
within a given area.
Consequently, we conclude that economic efficiencies and the
public interest in safe and adequate service and facilities
and orderly infrastructure development will be amply served by
allowing multiple gas utilities to compete to serve an area...
The policy has encouraged aggressive and innovative proposals
for development of service to previously unserved areas. We
see no benefit in cutting off competition at this point and
foreclosing further benefits that it may provide."
EXHIBIT A-1
Exhibit A-1
Page 1 of 2
DOMESTIC
LIMITED LIABILITY COMPANY
STATE OF MAINE
ARTICLES OF ORGANIZATION OF
LIMITED LIABILITY COMPANY
Pursuant to 31 MRSA sect. 622, the undersigned adopts the following articles of
organization:
FIRST: The name of the limited liability company is CMP Natural
Gas, L.L.C.
SECOND: The name of its Registered Agent, an individual Maine
resident or a corporation, foreign or domestic, authorized
to do business or carry on activities in Maine, and the
address of the registered office shall be
Joseph D. Fay
83 Edison Drive
Augusta, Maine 04336
THIRD: 1. The management of the company is vested in a manager
or managers. The minimum number shall be 1 manager
and the maximum number shall be 2 managers.
2. If the initial managers have been selected, the name
and business, residence or mailing address of each
manager is:
Name Address
Tim D. Kelley New York State Electric & Gas Corporation
4500 Vestal Parkway East
Binghamton, NY 13902
Darrel R. Quimby CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
Exhibit A-1
Page 2 of 2
ORGANIZER DATED September 1, 1998
Central Maine Power Company
By Anne M. Pare
Anne M. Pare, Secretary and Clerk
The undersigned hereby accepts the appointment as registered agent for the above
named limited liability company
REGISTERED AGENT DATED September 1, 1998
Joseph D. Fay
Joseph D. Fay
EXHIBIT B-1
CMP GAS COMPANY, L.L.C.
JOINT VENTURE AGREEMENT
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CMP GAS COMPANY, L.L.C.
JOINT VENTURE AGREEMENT
TABLE OF CONTENTS
ARTICLE I....................................................................................................... xi
ARTICLE II...................................................................................................... 7
2.1 Formation............................................................................................. 7
2.2 Name.................................................................................................. 7
2.3 Principal Place of Business; Principal Executive Office............................................... 7
2.4 Registered Office and Registered Agent................................................................ 8
ARTICLE III..................................................................................................... 8
ARTICLE IV...................................................................................................... 8
ARTICLE V....................................................................................................... 9
5.1 Management............................................................................................ 9
5.2 Limitations on Manager's Authority.................................................................... 9
5.3 Number, Tenure, and Qualifications of Manager, Members of the Management Committee.................... 11
5.4 Removal and Resignation of the Manager and Members of the Management Committee; Manner of
Acting....................................................................................... 11
5.5 Duties of the Manager, Members of the Management Committee, and the Members........................... 12
5.6 The Manager, Members of the Management Committee, and the Members Have No Exclusive Duty to
Company....................................................................................... 13
5.7 Bank Accounts......................................................................................... 13
5.8 Indemnification of the Members, Manager, Members of the Management Committee, Employees, and
Other Agents.................................................................................. 13
5.9 Vacancies............................................................................................. 17
5.10 Delegation of Authority............................................................................... 17
5.11 Employees............................................................................................. 17
5.12 Employee Costs........................................................................................ 18
ARTICLE VI...................................................................................................... 18
6.1 Limitation of Liability............................................................................... 18
6.2 Company Debt Liability................................................................................ 18
6.3 Company Books......................................................................................... 18
6.4 Priority and Return of Capital........................................................................ 18
ARTICLE VII..................................................................................................... 19
7.1 Meetings.............................................................................................. 19
7.2 Place of Meetings..................................................................................... 19
7.3 Notice of Meetings.................................................................................... 19
7.4 Meeting of all Members................................................................................ 19
7.5 Record Date........................................................................................... 19
7.6 Quorum 19
7.7 Manner of Acting...................................................................................... 20
7.8 Proxies............................................................................................... 20
7.9 Action by Members Without a Meeting................................................................... 20
7.10 Waiver of Notice...................................................................................... 20
7.11 Stalemates or Impasses................................................................................ 20
7.12 Frequency of Meetings................................................................................. 21
7.13 Notice of Meetings; Management Committee.............................................................. 21
7.14 Location and Conduct of the Meetings;
Adjournments.......................................................................................... 21
7.15 Waiver of Notice...................................................................................... 22
7.16 Proxies............................................................................................... 22
7.17 Quorum; Management Committee.......................................................................... 22
7.18 Action by Management Committee Without a Meeting...................................................... 22
ARTICLE VIII.................................................................................................... 22
8.1 Members' Initial Capital Contributions................................................................ 22
8.2 Additional Capital Contributions...................................................................... 23
8.3 Capital Accounts...................................................................................... 23
8.4 Withdrawal or Reduction of Members' Contributions to Capital.......................................... 24
8.5 Debt/Equity Ratio..................................................................................... 24
ARTICLE IX...................................................................................................... 25
9.1 Allocations of Profits and Losses from Operations..................................................... 25
9.2 Special Allocations to Capital Accounts and Certain Other Income Tax Allocations...................... 25
9.3 Distributions......................................................................................... 26
9.4 Limitation Upon Distributions......................................................................... 26
9.5 Accounting Principles................................................................................. 27
9.6 Interest On and Return of Capital Contributions....................................................... 27
9.7 Accounting Period..................................................................................... 27
9.8 Records and Reports................................................................................... 27
9.9 Returns and other Elections........................................................................... 28
ARTICLE X....................................................................................................... 28
10.1 General. ............................................................................................. 28
10.2 Right of First Refusal................................................................................ 29
10.3 Transfers by Operation of Law......................................................................... 31
ARTICLE XI...................................................................................................... 32
ARTICLE XII..................................................................................................... 32
12.1 Dissolution........................................................................................... 32
12.2 Effect of Filing of Dissolving Statement.............................................................. 32
12.3 Winding Up, Liquidation, and Distribution of Assets................................................... 33
12.4 Certificate of Cancellation. ......................................................................... 34
12.5 Return of Capital Contribution - Nonrecourse.......................................................... 34
12.6 Breach of Joint Venture Agreement; Remedies; Survival................................................. 34
ARTICLE XIII.................................................................................................... 34
ARTICLE XIV..................................................................................................... 35
ARTICLE XV...................................................................................................... 36
ARTICLE XVI..................................................................................................... 37
16.1 Notices.............................................................................................. 37
16.2 Books of Account and Records......................................................................... 37
16.3 Application of Maine Law............................................................................. 37
16.4 Amendments........................................................................................... 37
16.5 Execution of Additional Instruments.................................................................. 37
16.6 Construction......................................................................................... 37
16.7 Headings and Pronouns................................................................................ 37
16.8 Waivers.............................................................................................. 38
16.9 Rights and Remedies Cumulative....................................................................... 38
16.10 Severability......................................................................................... 38
16.11 Heirs, Successors and Assigns........................................................................ 38
16.12 Creditors............................................................................................ 38
16.13 Counterparts......................................................................................... 38
16.14 Integration.......................................................................................... 38
16.15 Maine Securities Law................................................................................. 38
16.16 Public Announcements................................................................................. 39
16.17 Indemnification...................................................................................... 39
16.18 Confidentiality...................................................................................... 39
16.19 No Third Party Beneficiaries......................................................................... 40
16.20 Equitable Relief..................................................................................... 40
16.21 Counterparts......................................................................................... 40
16.22 No Partnership Created............................................................................... 41
16.23 Audit Rights......................................................................................... 41
16.24 Agreement Jointly Drafted............................................................................ 41
16.25 Ratification by CMP Gas Company, L.L.C............................................................... 41
16.26 Further Assurances. ................................................................................. 41
APPENDICES
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JOINT VENTURE AGREEMENT
OF
CMP GAS COMPANY, L.L.C
THIS JOINT VENTURE AGREEMENT ("Agreement") is made and entered into as
of this 13th day of November, 1997, by and between Central Maine Power Company
("CMP"), a Maine corporation, and New York State Electric & Gas Corporation
("NYSEG"), a New York corporation, and is to take effect on the later of (a) the
date of this Joint Venture Agreement or, (b) the date on which the CMP Gas
Company, L.L.C's ("Company's") initial Articles of Organization are filed with
the Secretary of State of the State of Maine in substantial compliance with the
requirements of the Act or, (c) the date on which NYSEG and CMP have received
both Boards of Directors' and all necessary regulatory approvals to enter into
this Agreement ("the "Effective Date").
WITNESSETH:
In consideration of the mutual covenants contained in this Joint
Venture Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 In addition to the terms defined elsewhere in this Joint Venture
Agreement, the following terms shall have the following respective meanings:
(a) "Act" means the Maine Limited Liability Company Act, 31 M.R.S.A.
sect. 601 et seq., and all amendments thereto.
(b) "Affiliate" means, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by, or under common control with
such Person, (ii) any Person owning or controlling ten percent (10%) or more of
the outstanding voting interests of such Person, (iii) any officer, director, or
general partner of such Person, or (iv) any Person who is an officer, director,
general partner, trustee, or holder of ten percent (10%) or more of the voting
interests of any Person described in clauses (i) through (iii) of this sentence.
For purposes of this definition, the terms "controls," "is controlled by," or
"is under common control with" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise.
(c) "Articles of Organization" means the Articles of Organization of
the Company as filed with the Secretary of State as the same may be amended from
time to time by the vote of Members holding a majority of the Capital Interests
by action taken as provided in Article V, Section 7.7 or Section 7.9 hereof, as
applicable.
(d) "Capital Account" means, as of any given date, the Capital
Contribution to the Company by a Member as adjusted up to the date in question
pursuant to Article VIII herein.
(e) "Capital Contributions" means the total amount of cash, and the
value, determined by a majority of the members of the Management Committee, of
all tangible or intangible property or services, which a Member or its
predecessor in interest has contributed or has agreed to contribute to the
Company net of liabilities secured thereby that the Company is considered to
assume or to be subject to under Section 752 of the Code.
(f) "Capital Interest" means the proportion that a Member's positive
Capital Account bears to the aggregate positive Capital Accounts of all Members
whose Capital Accounts have positive balances, all as adjusted from time to time
as provided in this Agreement.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Company" means the limited liability company to be formed pursuant
to this Operating Agreement.
(i) "Deficit Capital Account" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
taxable year, after giving effect to the following adjustments:
(i) credit to such Capital Account any amount that such Member
is obligated to restore under Section 1.704-1(b)(2)(ii)(c) of the
Treasury Regulations, as well as any addition thereto pursuant to the
next to last sentence of Sections 1.704-2(g)(1) and (i)(5) of the
Treasury Regulations, after taking into account thereunder any changes
during such year in limited liability company minimum gain attributable
to any member non-recourse debt (as determined under Section
1.704-2(i)(3) of the Treasury Regulations); and
(ii) debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury
Regulations.
This definition of Deficit Capital Account is intended to comply with the
provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and 1.704-2, and
will be interpreted consistently with those provisions.
(j) "Depreciation" means, for each Fiscal Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the Gross Asset Value
of an asset differs from its adjusted basis for federal income tax purposes at
the beginning of such Fiscal Year, Depreciation shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such Fiscal
Year bears to such beginning adjusted tax basis; provided, however, that if the
adjusted basis for federal income tax purposes of an asset at the beginning of
such Fiscal Year is zero, Depreciation shall be determined with reference to
such beginning Gross Asset Value using any reasonable method selected by the
Manager.
(k) "Distributable Cash" means all cash, revenues, and funds received
by the Company, less the sum of the following to the extent paid or set aside by
the Company: (i) all principal and interest payments on indebtedness of the
Company and all other sums paid to lenders; (ii) all cash expenditures incurred
incident to the normal operation of the Company's business; and (iii) Reserves.
(l) "Economic Interest" means a Member's share of one or more of the
Company's Net Profits, Net Losses, and distributions of the Company's assets
pursuant to this Joint Venture Agreement and the Act.
(m) PURPOSEFULLY LEFT BLANK.
(n) PURPOSEFULLY LEFT BLANK.
(o) "Entity" means any general partnership, limited partnership,
limited liability company, corporation, joint venture, trust, business trust,
cooperative, or association or any foreign trust or foreign business
organization.
(p) "Fiscal Year" means the Company's fiscal year which shall be the
calendar year.
(q) "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by
a Member to the Company shall be the gross fair market value of such
asset, as determined by a majority of the members of the Management
Committee.
(ii) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values, as
determined by a majority of the members of the Management Committee as
of the following times: (a) the acquisition of an additional interest
by any new or existing Member in exchange for more than a de minimis
Capital Contribution; (b) the distribution by the Company to a Member
of more than a de minimis amount of property as consideration for a
Membership Interest or Economic Interest; and (c) the liquidation of
the Company within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to
clauses (a) and (b) above shall be made only if a majority of the
members of the Management Committee reasonably determine that such
adjustments are necessary or appropriate to reflect the relative
Economic Interests of the Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed
to any Member shall be adjusted to equal the gross fair market value of
such asset on the date of distribution as determined by a majority of
the members of the Management Committee; and
(iv) The Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulation Section
1.704-1(b)(2)(iv)(m) and Section 8.3 and subparagraph (iv) under the
definition of Net Profits and Net Losses; provided, however, that Gross
Asset Values shall not be adjusted pursuant to this definition to the
extent a majority of the members of the Management Committee determine
that an adjustment pursuant to subparagraph (ii) of this definition is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this subparagraph (iv).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
subparagraph (i), (ii), or (iv) of this definition, then such Gross Asset Value
shall thereafter be adjusted by the Depreciation taken into account with respect
to such asset for purposes of computing Net Profits and Net Losses.
(r) "Majority Interest" means one or more Capital Interests of Members
which, taken together, exceed fifty percent (50%) of the aggregate of all
Capital Interests.
(s) "Management Committee" means a four-person body, two (2) of whom
shall be appointed by NYSEG and two (2) of whom shall be appointed by CMP. The
Initial Management Committee shall be composed of the following individuals:
Arthur W. Adelberg and David E. Marsh, who are the designees of CMP, and Michael
I. German and George E. Bonner, who are the designees of NYSEG. The initial
Chairman of the Management Committee shall be Arthur W. Adelberg. The
Chairmanship of the Management Committee shall be for a one year term. The
Chairmanship shall alternate year to year between a designee of CMP and NYSEG.
CMP and NYSEG shall each be entitled to designate two (2) alternate members of
the Management Committee, a primary alternate and a secondary alternate. The
initial primary alternate and secondary alternate for CMP are Joseph D. Fay and
Chad P. Clark, respectively. The initial primary alternate and secondary
alternate for NYSEG are Michael D. Eastman and Steven R. Adams, respectively.
Alternative members of the Management Committee may serve as alternates for
either of their Management Committee Members. Alternates shall serve in the
absence of the designated member(s) of the Management Committee. The Management
Committee members shall have the right to remove their designated alternates and
to designate their replacements, in each case by written notice to the other
party.
(t) "Manager" means a Person(s) initially designated as such by this
Joint Venture Agreement or the Articles of Organization or thereafter elected to
such position in accordance with Section 5.3, until removal, resignation, or
replacement.
(u) "Member" means each of the parties who executes a counterpart of
this Joint Venture Agreement as a Member and each of the parties who may
hereafter become Members, until withdrawal.
(v) "Membership Interest" means a Member's entire interest in the
Company including such Member's Economic Interest and such other rights and
privileges that the Member may enjoy by being a Member.
(w) "Net Cash Flow" means the Net Profits (or Net Losses) for the
Fiscal Year as shown on the Company's books and records, including dividends,
capital gains, involuntary conversions, and gains or losses from Section 1231
property, as defined in the Code:
(i) increased by the amount of Depreciation and amortization
deductions taken in computing such taxable income;
(ii) decreased by payments upon the principal of any
indebtedness, secured or unsecured, of the Company;
(iii) decreased by expenditures for the acquisition of
property, capital improvements, additions, or replacements (except to
the extent financed through any Company indebtedness, secured or
unsecured); and
(iv) increased or decreased as appropriate for changes in
reserves for additional acquisitions of property, improvements,
replacements, and, subject to the limitations contained in Section
1.1(bb) of this Agreement, such reserves for repairs and to meet
anticipated expenses or unexpected and unforeseen expenses and for
working capital as a majority of the members of the Management
Committee shall deem to be reasonably necessary in the efficient
conduct of the Company's business, and any cash outlays or receipts not
otherwise taken into account in this definition.
(x) "Net Profits" and "Net Losses" mean for each taxable year of the
Company an amount equal to the Company's net taxable income or loss for such
year as determined for federal income tax purposes (including separately stated
items) in accordance with the accounting method and rules used by the Company
and in accordance with Section 703 of the Code with the following adjustments:
(i) any items of income, gain, loss, and deduction allocated
to Members pursuant to Section 9.2 shall not be taken into account in
computing Net Profits or Net Losses for purposes of this Joint Venture
Agreement;
(ii) any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Net
Profits and Net Losses (pursuant to this definition) shall be added to
such taxable income or loss;
(iii) any expenditure of the Company described in Section
705(a)(2)(B) of the Code and not otherwise taken into account in
computing Net Profits and Net Losses (pursuant to this definition)
shall be subtracted from such taxable income or loss;
(iv) in the event the Gross Asset Value of any Company asset
is adjusted pursuant to clause (ii) or (iii) of the definition of Gross
Asset Value, the amount of such adjustment shall be taken into account
as gain or loss from the disposition of such asset for purposes of
computing Net Profits and Net Losses;
(v) gain or loss resulting from any disposition of any Company
asset with respect to which gain or loss is recognized for federal
income tax purposes shall be computed with reference to the Gross Asset
Value of the asset disposed of, notwithstanding that the adjusted tax
basis of such asset differs from its Gross Asset Value;
(vi) in lieu of the depreciation, amortization and other cost
recovery deductions taken into account in computing such taxable income
or loss, there shall be taken into account Depreciation for such Fiscal
Year; and
(vii) to the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Section 734(b) of the Code or Section
743(b) of the code is required pursuant to Section
1.704-1(b)(2)(iv)(m)(4) of the Treasury Regulations to be taken into
account in determining Capital Accounts as a result of a distribution
other than in liquidation of a Membership Interest, the amount of such
adjustment shall be treated as an item of gain (if the adjustment
decreases the basis of the asset) from the disposition of the asset and
shall be taken into account for purposes of computing Net Profits or
Net Losses.
(y) PURPOSEFULLY LEFT BLANK.
(z) "Person" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors, and assigns of
such Person where the context so permits.
(aa) "Reserves" shall mean, with respect to any fiscal period, funds
set aside or amounts allocated during such period to reserves which shall be
maintained in amounts deemed sufficient by a majority of the members of the
Management Committee for working capital and to pay taxes, insurance, debt
service, or other costs or expenses incident to the ownership or operation of
the Company's business.
(bb) "Secretary of State" means the Secretary of State of the State of
Maine.
(cc) "Selling Member" means any Member which sells, assigns, or
otherwise transfers for consideration all or any portion of its Membership
Interest.
(dd) "Statement of Authority" means a statement of limited liability
company authority with respect to the Company adopted by the Members and filed
with the Secretary of State or recorded in any registry of deeds pursuant to
Section 626 of the Act, as amended.
(ee) "Transferring Member" shall mean a Selling Member.
(ff) "Treasury Regulations" shall include proposed, temporary, and
final regulations promulgated under the Code in effect as of the date of filing
the Articles of Organization and the corresponding sections of any regulations
subsequently issued that amend or supersede such regulations.
ARTICLE II
FORMATION OF COMPANY
2.1 Formation. The parties hereby agree to the formation of a Joint
Venture Company that shall take the form of a Maine Limited Liability Company
("L.L.C."). The L.L.C. shall be formed and operated in accordance with the terms
of this Agreement. The Company shall be formed at the time of the filing of the
initial Articles of Organization with the Secretary of State in substantial
compliance with the Act, and, until such time, no Person shall be authorized to
take any action pursuant to this Joint Venture Agreement except for the purpose
of effecting such formation. Provided further, the parties understand and agree
that, absent mutual consent of the parties, no filing of Articles of
Organization for the Company shall take place, and that this Agreement shall
become null and void, unless both parties receive Board of Directors approval to
enter into this Joint Venture and to enter into this Joint Venture Agreement on
or before December 31, 1997, and unless both parties receive all necessary
regulatory approvals on or before September 30, 1998, to permit the parties to
form the Company and to expend the monies necessary to set up, own and operate a
natural gas distribution company business in Maine, which regulatory approvals
the parties agree they will in good faith diligently pursue. The parties agree
that similar regulatory approvals will be sought for a natural gas distribution
business in portions of New Hampshire, but failure to receive necessary New
Hampshire regulatory approvals in a timely fashion shall not make this Agreement
null and void.
2.2 Name. The name of the Company is CMP Gas Company, L.L.C.
2.3 Principal Place of Business; Principal Executive Office. The
Company's initial principal place of business shall be Augusta, Maine, and its
principal executive office shall be at 83 Edison Drive, Augusta, Maine 04336.
The Company may relocate its principal place of business or its principal
executive office from time to time as a majority of the members of the
Management Committee deems advisable.
2.4 Registered Office and Registered Agent. The address of the
Company's initial registered office shall be 83 Edison Drive, Augusta, Maine
04336. The name and address of the Company's initial registered agent shall be
Joseph D. Fay, 83 Edison Drive, Augusta, Maine 04336. The registered office and
registered agent may be changed from time to time as the Manager deems advisable
by filing notice of such changes with the Secretary of State in accordance with
Section 607 of the Act.
ARTICLE III
BUSINESS OF COMPANY
The Company exists for the purpose of (a) engaging in the business of
owning, constructing, and operating a local distribution company to provide
natural gas distribution and related services to customers in Maine and to
customers in the proximity of Portland Natural Gas Transmission System ("PNGTS")
and/or Maritimes and Northeast Pipeline, L.L.C. ("Maritimes") in New Hampshire
and to engage in such other businesses as may be subsequently agreed to by the
Management Committee. Provided, however, the New Hampshire portion of the
business may be structured as a separate entity or, in the alternative, may be
owned by either or both Members by a separate wholly-owned entity of such Member
or by a wholly-owned entity to be formed by such Member(s) to the extent such
separate entity is necessary from a regulatory or economic standpoint or to
avoid adverse consequences under the Public Utility Holding Company Act of 1935.
The parties agree to cooperate in the re-structuring of the New Hampshire
portion of the business to the extent either or both parties desire to break the
New Hampshire portion of the business into a separate business entity as set
forth in this Section, provided they can do so without adverse consequences to
either party.
The provisions of this Article III shall be applied in any
interpretation of the duties of Members or the Manager under 31 M.R.S.A. sect.
652 or this Joint Venture Agreement, and the rights and duties of the Manager as
provided in Sections 5.1, 5.3, 5.5, and 5.6 hereof. The authority granted to the
Manager under this Joint Venture Agreement or the Act to bind the Company shall
be limited to actions necessary or convenient to this business purpose, and
shall be further limited as provided in Article V hereof, in the Articles of
Organization, and in any Statement of Authority.
ARTICLE IV
IDENTITY OF MEMBERS
The names and addresses of the Members, their respective Capital
Interests, and their initial Capital Contributions are to be set forth on a
schedule maintained by the Manager at the Company's principal office. The
initial version of such schedule is attached hereto as Exhibit A. Such schedule
shall be modified from time to time to reflect changes thereto made in
accordance with this Joint Venture Agreement and the Act and shall be made
available to any Member upon request.
ARTICLE V
RIGHTS AND DUTIES OF THE MANAGER,
THE MANAGEMENT COMMITTEE AND THE MEMBERS
5.1 Management. The Manager is charged with the responsibility for, and
is vested with the exclusive authority to manage, the Company's business, except
as limited by this Joint Venture Agreement, the Articles of Organization, or any
Statement of Authority, and except in those cases in which the approval of the
Members or the Management Committee is expressly required by this Joint Venture
Agreement or by the Act. No Member who is not also a Manager shall have
authority or take any action to bind the Company, other than as provided in the
Articles of Organization or in a Statement of Authority or as expressly
contemplated by this Agreement. In furtherance of its authority, subject to the
provisions of Section 5.2 hereof, the Manager is authorized and empowered to
perform any and all acts customary or incident to the management of the
Company's business. The Company shall be bound by the act of the Manager for the
purpose of apparently carrying on in the usual way the business or affairs of
the Company, including the exercise of the authority indicated in this Article
V, except as to Persons having knowledge (as defined in 31 M.R.S.A. sect. 752
(or any successor provision) that such act was in contravention of this Article
V, the Articles of Organization, a Statement of Authority, the Act or any other
provision of this Joint Venture Agreement, and no person dealing with the
Company shall have any obligation to inquire into the power or authority of the
Manager if so acting on behalf of the Company.
5.2 Limitations on Manager's Authority.
(a) Management Committee Authorization Required. Notwithstanding
anything to the contrary contained in this Article V, the Manager shall have no
authority to take any of the following actions on behalf of the Company without
first obtaining the affirmative vote of a majority of the members of the
Management Committee, to which exclusive authority is reserved with respect to
the following matters:
(i) incur any indebtedness for borrowed money on behalf of the
Company or refinance any such indebtedness of the Company; issue notes,
bonds, or other obligations or securing obligations by mortgage or
pledge of any of its property or income or assuming any liabilities, in
any transaction or series of transactions, if such transactions are not
in the ordinary course of business of the Company;
(ii) confess a judgment against the Company in an amount in
excess of $50,000, or release, settle or compromise any claim or right
in favor of the Company having a value in excess of $50,000;
(iii) cause the Company to incur any liabilities in any single
transaction or series of related transactions in excess of $100,000;
(iv) (A) make capital expenditures in any single transaction
or series of related transactions in excess of $100,000, or (B) incur
operating expenses in excess of amounts authorized in the annual
operating budget approved by a majority of the members of the
Management Committee;
(v) other than as expressly contemplated by this Agreement,
consummate any transaction between the Company and any Member or any
Affiliate of any Member;
(vi) establish Reserves as contemplated by Section 1.1(bb)
hereof;
(vii) make distributions to Members with respect to their
relative Membership Interests;
(viii) admit new Members to the Company or issue any interest
in the Company;
(ix) knowingly do any act in contravention of this Joint
Venture Agreement;
(x) knowingly do any act which would make it impossible to
carry on the ordinary business of the Company, except as otherwise
provided in this Joint Venture Agreement;
(xi) cause the Company to voluntarily take any action that
would cause a bankruptcy or dissolution of the Company;
(xii) sell or otherwise transfer all or substantially all of
the assets of the Company, act to dissolve the Company and wind up its
affairs, or cause the Company to merge or consolidate with or into any
Entity;
(xiii) enter into derivative transactions;
(xiv) declare a distribution of profits;
(xv) appoint an independent auditor of the Company or approve
the annual budget;
(xvi) consolidate or merge the Company with another entity;
(xvii) engage in business acquisitions;
(xviii) except as provided in Paragraph 8.2, call for
additional Capital Contributions;
(xix) appoint or remove an officer of the Company; or
(xx) determine compensation, pay bonuses, establish or modify
pension, profit sharing, stock option, benefit or incentive plans.
(b) Permitted Transactions. Notwithstanding anything to the
contrary contained in this Agreement, the Manager is expressly
authorized to negotiate and execute any agreements related to any other
agreements necessary to carry out the business purposes of the Company
as authorized by the Management Committee, subject to the limitations
contained in Section 5.2 (a) herein.
5.3 Number, Tenure, and Qualifications of Manager, Members of the
Management Committee. The initial Manager(s) of the Company shall be Tim D.
Kelley and Darrel R. Quimby, and their titles shall be President & Chief
Executive Officer and Vice President (hereinafter collectively referred to as
"Manager"), respectively. The President & Chief Executive Officer ("CEO") and
Vice President shall act in such capacity as Manager and with the aforesaid
titles at the discretion of the Management Committee. In the event the President
& CEO and Vice President disagree on any issue within the scope of the Manager's
responsibility, the decision of the President & CEO shall be controlling. The
Manager shall have no contractual right to such position independent of this
Joint Venture Agreement. The Manager shall hold office until his or her
successor shall have been elected and qualified unless he or she resigns or is
removed under Section 5.4 herein. The Management Committee shall, as provided in
Section 1.1 (s) hereof, initially be comprised of four members, each of whom
shall serve until his or her removal or resignation or until his or her
successor is elected. Any vacancy in the Management Committee created by removal
or resignation of any of its members shall be filled by action of the Member
entitled to appoint the member of the Management Committee whose removal or
resignation gave rise to the vacancy.
5.4 Removal and Resignation of the Manager and Members of the
Management Committee; Manner of Acting.
(a) Removal. The Manager may be removed at any time, with or without
cause, by a vote of the Members holding at least a Majority Interest. Any member
of the Management Committee may be removed at any time, with or without cause,
by action of the Member who designated such Committee member. Upon removal of a
member of the Management Committee, the Member's primary alternate will serve as
the acting member of the Management Committee for that member until such time as
the Member appoints a permanent member.
(b) Resignation. The Manager and any member of the Management Committee
may resign such position by giving written notice to each Member, and (if an
individual) shall be deemed to have resigned upon his or her death.
(c) Manner of Acting. Any action required or permitted to be taken by
the Manager or the Management Committee pursuant to this Joint Venture Agreement
may be taken either at a meeting or by written consent executed by the Manager
or by the number of members of the Management Committee, as the case may be,
whose vote or consent is required for the taking of the action described
therein. Action may be taken based upon teleconference authorizations, if agreed
to by the Members, and all meetings may be held by teleconference or using
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time, if agreed to by the Members.
Participation by such means shall constitute presence in person at the meeting.
5.5 Duties of the Manager, Members of the Management Committee, and the
Members.
(a) The Manager, each member of the Management Committee, and each
Member shall exercise its or his powers and discharge its or his duties in good
faith with a view to the interests of the Company and its Members with that
degree of diligence, care, and skill that ordinarily prudent persons would
exercise under similar circumstances in like positions. The Manager, the members
of the Management Committee, and the Members may in all cases, if acting
reasonably and in good faith, rely upon financial statements of the Company that
were either certified in writing by an independent or certified public
accountant or firm of such accountants fairly to reflect the Company's financial
condition, or reported to such Manager, Management Committee member, or Member
to be correct by the Manager or Member having charge of the books of accounts of
the Company. A Manager, Management Committee member, or Member may not be held
personally liable for monetary damages for failure to discharge any duty as a
Manager, Management Committee member, or Member unless the Manager, Management
Committee member or Member is found not to have acted honestly or in the
reasonable belief that the action was in or not opposed to the best interests of
the Company or its Members.
(b) Every Member, every member of the Management Committee, and the
Manager must account to the Company and hold as trustee for it any profit or
benefit derived by that Person from any transaction connected with the conduct
of the Company's business or winding up of the Company, or any use by the
Manager or any such Management Committee member or Member of the Company's
property, including, but not limited to, confidential or proprietary information
of the Company entrusted to the Person as a result of that Person's status as a
Manager, Management Committee member, or Member, unless that Person has obtained
the consent of more than one half by number of the disinterested Members;
provided, however, it is not intended that payments made by the Company to
Members pursuant to the Support Services Agreements (See Exhibits C and D) are
to be accounted to the Company.
(c) The Manager shall prepare and submit to the Management Committee
for approval by a majority of the members thereof annual an operating budget for
the Company, and shall report to the Management Committee on a quarterly basis
with respect to the Company's actual performance for the preceding fiscal
quarter and for the fiscal year to date as compared to the budget then in
effect.
5.6 The Manager, Members of the Management Committee, and the Members
Have No Exclusive Duty to Company. Notwithstanding the provisions of Section 5.5
hereof, any Member and, provided that such activities do not violate or conflict
with the terms of any written employment, consulting, independent contractor, or
other agreement between the Company and such Manager or committee member, the
Manager, or any member of the Management Committee may have other business
interests and may engage in other activities in addition to those relating to
the Company, other than interests or activities substantially similar to or
competitive with the activities of the Company described in Article III hereof,
as modified from time to time. Neither the Company nor any Member shall have any
right, by virtue of this Joint Venture Agreement, to share or participate in
such other permitted investments or activities of the Manager, any committee
member or any Member or to the income or proceeds derived therefrom. No Manager,
committee member, or Member shall incur any liability to the Company or to any
of the Members as a result of engaging in any such other permitted business or
venture.
5.7 Bank Accounts. The Manager may from time to time open bank accounts
in the name of the Company, and any officer or other designee of the Manager
shall be a signatory thereon, unless a majority of the members of the Management
Committee determines otherwise.
5.8 Indemnification of the Members, Manager, Members of the Management
Committee, Employees, and Other Agents.
(a) General. The Company shall in all cases indemnify any person who is
or was a Member, Management Committee member or Manager, and may (subject to
Section 5.8(d)) indemnify any other person, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a Member, Manager, Management Committee
member, employee, or agent of the Company, or is or was serving at the request
of the Company as a member, principal, director, officer, trustee, partner,
fiduciary, employee, or agent of another Entity, pension, or other employee
benefit plan or other enterprise, against expenses, including attorneys' fees,
judgments, fines, and amounts paid in settlement to the extent actually and
reasonably incurred by that person in connection with such action, suit, or
proceeding; provided that no indemnification may be provided for any person with
respect to any matter as to which that person shall have been finally
adjudicated:
(i) Not to have acted honestly or in the reasonable belief
that that person's action was in or not opposed to the best interests
of the Company or its Members or, in the case of a person serving as a
fiduciary of an employee benefit plan or trust, in or not opposed to
the best interests of that plan or trust, or its participants, or
beneficiaries;
(ii) With respect to any criminal action or proceeding, to
have had reasonable cause to believe that that person's conduct was
unlawful; or
(iii) To have acted without authorization under or in
violation of this Joint Venture Agreement.
The termination of any action, suit or proceeding by judgment, order or
conviction adverse to that person, or by settlement or plea of nolo contendere
or its equivalent, shall not of itself create a presumption that (i) that person
did not act honestly or in the reasonable belief that that person's action was
in or not opposed to the best interests of the Company or its Members or, in the
case of a person serving as a fiduciary of an employee benefit plan or trust, in
or not opposed to the best interests of that plan or trust or its participants
or beneficiaries, (ii) with respect to any criminal action or proceeding, had
reasonable cause to believe that that person's conduct was unlawful, or (iii)
that person acted without authorization under or in violation of this Joint
Venture Agreement.
(b) Derivative Actions. Notwithstanding any provision of Section 5.8(a)
or (d), the Company shall not indemnify any person with respect to any claim,
issue, or matter asserted by or in the right of the Company as to which that
person is finally adjudicated to be liable to the Company unless the court in
which the action, suit, or proceeding was brought shall determine that, in view
of all the circumstances of the case, that person is fairly and reasonably
entitled to indemnity for such amounts as the court shall deem reasonable.
(c) Special Right to Indemnification in Certain Cases. Any provisions
of Section 5.8(a), (b), or (d) to the contrary notwithstanding, to the extent
that a Member, Manager, Management Committee member, employee, or agent of the
Company, or any other person whom the Company has authority to indemnify under
Section 5.8(a), has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in Section 5.8(a) or (b), or in defense
of any claim, issue, or matter referred to therein, that person shall be
indemnified against expenses, including attorneys' fees, actually and reasonably
incurred by that person in connection therewith. The right to indemnification
granted by this Section 5.8(c) may be enforced by a separate action against the
Company if an order for indemnification is not entered by a court in the action,
suit, or proceeding wherein that Member, Manager, Management Committee member,
employee, agent, or other person was successful on the merits or otherwise.
(d) Mandatory Indemnification for Members, Management Committee
Members, and Manager; Determinations in Specific Cases for Others. Any
indemnification under Section 5.8(a), unless ordered by a court or required by
this Section 5.8, shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of any Member, Manager,
Management Committee member, employee, agent, or other person is proper in the
circumstances and in the best interests of the Company; provided that no such
determination shall be required with respect to any person who is or was a
Member or Manager and indemnification of any such person under Section 5.8(a)
shall be required in all cases, regardless of the capacity in which such Member,
Management Committee member, or Manager is or was made or threatened to be made
a party to the action, suit or proceeding. Where such a case specific
determination is required, that determination shall be made by the Members by a
majority vote of a quorum consisting of a majority of the Members who were not
parties to that action, suit, or proceeding, or if such a quorum is not
obtainable, or even if obtainable, if a quorum of disinterested Members so
directs, by independent legal counsel in a written opinion. Such a determination
once made may not be revoked and, upon the making of that determination, the
employee, agent, or other person may enforce the indemnification against the
Company by a separate action notwithstanding any attempted or actual subsequent
action by the Members.
(e) Advancement of Expenses. Except in the case of any person who is or
was a Member, Management Committee member, or Manager, expenses incurred in
defending a civil, criminal, administrative, or investigative action, suit, or
proceeding may be authorized and paid by the Company in advance of the final
disposition of that action, suit, or proceeding upon a determination made in
accordance with the procedure established in Section 5.8(d) that, based solely
on the facts then known to those making the determination and without further
investigation, the person seeking indemnification satisfied the standard of
conduct prescribed by Section 5.8(a), and upon receipt by the Company of:
(i) A written undertaking by or on behalf of the person to
repay that amount if that person is finally adjudicated:
(A) Not to have acted honestly or in the reasonable
belief that that person's action was in or not opposed to the
best interests of the Company or its Members or, in the case
of a person serving as a fiduciary of an employee benefit plan
or trust, in or not opposed to the best interests of such plan
or trust or its participants or beneficiaries;
(B) With respect to any criminal action or
proceeding, to have had reasonable cause to believe that the
person's conduct was unlawful;
(C) To have acted without authorization under or in
violation of this Joint Venture Agreement; or
(D) With respect to any claim, issue or matter
asserted in any action, suit or proceeding brought by or in
the right of the Company, to be liable to the Company, unless
the court in which that action, suit or proceeding was brought
permits indemnification in accordance with Section 5.8(b); and
(ii) A written affirmation by the person that he has met the
standard of conduct necessary for indemnification by the Company as
authorized in this Section 5.8.
The undertaking required by clause (i) shall be an unlimited general
obligation of the person seeking the advance, but need not be secured and may be
accepted without reference to financial ability to make the repayment. With
respect to any person who is or was a Member, Management Committee member, or
Manager, such expenses shall in all cases be advanced by the Company, as
reasonably requested from time to time, upon receipt by the Company, at the time
of the initial advance, of the undertaking described in clause (i) and the
affirmation described in clause (ii) above.
(f) Indemnification Rights Under Joint Venture Agreement Not Exclusive;
Enforceable by Separate Action. The indemnification and entitlement to advances
of expenses provided by this Section 5.8 shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any agreement,
vote of Members, or otherwise, both as to action in that person's official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a Member, Manager, Management
Committee member, employee, agent, trustee, partner, or fiduciary and shall
inure to the benefit of the heirs, executors, and administrators of such a
person. A right to indemnification required by this Section 5.8 may be enforced
by a separate action against the Company, if an order for indemnification has
not been entered by a court in any action, suit, or proceeding in respect to
which indemnification is sought.
(g) Insurance. The Company shall purchase and maintain insurance on
behalf of any person who is or was a Member, Manager, or Management Committee
member, and shall have power to purchase and maintain insurance on behalf of any
person who is or was an employee or agent of the Company, or is or was serving
at the request of the Company as a member, principal, director, officer,
trustee, partner, fiduciary, employee, or agent of another Entity, pension, or
other employee benefit plan or other enterprise, against any liability asserted
against that person and incurred by that person in any such capacity, or arising
out of that person's status as such, whether or not the Company would have the
power to indemnify that person against such liability under this Section 5.8.
(h) Miscellaneous. For purposes of this Section 5.8, references to the
"Company" shall include, in addition to the surviving Entity or new Entity, any
participating Entity in a consolidation or merger. For purposes of this Section
5.8, the Company shall be deemed to have requested a person to serve an employee
benefit plan whenever the performance by the person of the person's duties to
the Company also imposes duties on, or otherwise involves services by, the
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person seeking indemnification with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines"; and action taken or
omitted by the person with respect to an employee benefit plan in the
performance of the person's duties for a purpose reasonably believed by the
person to be in the interests of the participants or beneficiaries of the plan
shall be deemed to be for a purpose which is in the best interests of the
Company.
(i) Amendment. Any amendment, modification, or repeal of this Section
5.8 shall not deny, diminish, or otherwise limit the rights of any person to
indemnification or advance hereunder with respect to any action, suit, or
proceeding arising out of any conduct, act, or omission occurring or allegedly
occurring at any time prior to the date of such amendment, modification, or
repeal.
(j) Indemnification by Members, Management Committee Members, and
Managers. A Member, Management Committee member, or Manager who takes any
unauthorized action purportedly on behalf of the Company shall indemnify and
hold the Company and the other Members, Management Committee members, and
Managers harmless from any costs (including, without limitation, reasonable
attorneys' fees) or damages incurred by any such indemnified parties as a result
thereof. The Company and any Member, Management Committee member, or Manager
entitled to indemnification under this Section 5.8(j) shall be entitled to set
off against, withhold, proceed against, or collect or receive from the Company,
as applicable, all or any part of the indemnifying Member's Membership Interest,
any amounts distributable with respect thereto or, following the withdrawal of
such Member or the dissolution of the Company, any amounts payable to the
indemnifying Member pursuant to this Joint Venture Agreement, or any amounts
payable to the indemnifying Manager or Management Committee member, as the case
may be, by the Company, under an employment agreement or otherwise, in order to
enforce its, his, or her rights hereunder. The obligations of the Members,
Management Committee members, and Managers hereunder shall survive the
withdrawal of any Member or the termination of a Manager's or Management
Committee member's status as such and the dissolution or termination of the
Company.
5.9 Vacancies. Subject to the provisions of Section 5.3 hereof, any
vacancy occurring for any reason in the position of Manager shall be filled by
the affirmative vote of Members holding a majority of the Capital Interests. A
Manager elected to fill a vacancy shall hold office until his or her successor
shall be elected and shall qualify or until his or her earlier resignation or
removal.
5.10 Delegation of Authority. The Manager shall be authorized to
delegate to any Member, employee, or agent of the Company any of the authority
conferred upon the Manager pursuant to this Joint Venture Agreement.
5.11 Employees. The parties currently contemplate that certain services
will be provided to the Company by employees of both of the Members. The
Management Committee will make the determination as to which services will be
provided to the Company by employees of the Members. The Manager will have the
responsibility to hire or contract for such other services as may be appropriate
and necessary for the proper functioning of the Company, subject to the
limitations on Manager's authority contained in Section 5.2.
5.12 Employee Costs. Except as otherwise determined by the
Management Committee, at such time as the Articles of Organization are filed for
the Company and the Company has been duly formed, the Support Services
Agreements, in substantially the form as set forth in Exhibits C and D, shall be
employed for purpose of establishing the cost reimbursement procedures for the
use by Company of Member employee and other assets. The parties agree that the
costs associated with the time Management Committee Members expend on the
Company shall not be reimbursed by the Company but that Management Committee
Members shall be reimbursed by the Company for all out-of-pocket expenses
associated with Management Committee activities, including, but not limited to,
travel expenses.
ARTICLE VI
RIGHTS AND OBLIGATIONS OF MEMBERS
6.1 Limitation of Liability. Each Member's liability shall be limited
as set forth in this Joint Venture Agreement, the Act, and other applicable law.
6.2 Company Debt Liability. A Member will not be personally liable for
any debts or losses of the Company beyond its respective Capital Contributions
and any obligation of the Member under Section 8.1 or 8.2 to make Capital
Contributions, except as otherwise required by law.
6.3 Company Books. In accordance with Section 9.8 hereof, the Manager
shall maintain and preserve, during the term of the Company, and for the length
of time thereafter as may be required to meet the records retention requirements
of any taxing or regulatory body having direct or indirect jurisdiction, all
accounts, books, and other relevant Company documents. Upon reasonable request,
each Member shall have the right, during ordinary business hours, to inspect and
copy such Company documents at the requesting Member's expense; provided,
however, that the Manager shall be authorized, in its discretion, to withhold
from or to restrict or condition the access of one or more Members to
information of the Company as and to the extent contemplated by 31 M.R.S.A.
sect. 655(2)(c).
6.4 Priority and Return of Capital. Except as may be expressly provided in
this Agreement hereof, no Member shall have priority over any other Member,
either as to the return of Capital Contributions or as to Net Profits, Net
Losses, or distributions; provided that this Section shall not apply to loans
(as distinguished from Capital Contributions) that a Member has made to the
Company.
ARTICLE VII
MEETINGS OF MEMBERS
7.1 Meetings. Meetings of the Members for any purpose may be called by
the Manager, by a majority of the members of the Management Committee, or by any
Member or Members holding at least thirty percent (30%) of the Capital
Interests.
7.2 Place of Meetings. The Person or Persons calling a meeting pursuant
to Section 7.1 hereof may designate any place, within or outside the State of
Maine, as the place of meeting for any meeting of the Members. If no designation
is made, the place of meeting shall be the principal executive office of the
Company. The Members and the Management Committee may, by agreement of the
Members, meet, act and conduct business through teleconference meetings or
meetings using other similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
in such teleconference(s) shall constitute presence in person at a meeting.
7.3 Notice of Meetings. Written notice stating the place, day, and hour
of the meeting and the purpose or purposes for which the meeting is called shall
be delivered not less than ten (10) nor more than sixty (60) days before the
date of the meeting, either personally, by mail, or facsimile, by or at the
direction of the Manager or Person(s) calling the meeting, to each Member
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
delivered three (3) business days after being deposited in the United States
mail, addressed to the Member at its address as it appears on the books of the
Company, with postage thereon prepaid. The business transacted at each annual
and special meeting shall be limited to the purpose(s) stated in the notice of
the meeting.
7.4 Meeting of all Members. If all of the Members shall meet at any
time and place and consent to the holding of a meeting at such time and place,
such meeting shall be valid without call or notice, and at such meeting lawful
action may be taken.
7.5 Record Date. For the purpose of determining Members entitled to
notice of or to vote at any meeting of members or any adjournment thereof, or
Members entitled to receive payment of any distribution, the date on which
notice of the meeting is mailed or the date on which the resolution declaring
such distribution is adopted, as the case may be, shall be the record date for
such determination of Members. When a determination of Members entitled to vote
at any meeting of Members has been made as provided in this Section, such
determination shall apply to any adjournment thereof.
7.6 Quorum. Members holding at least a majority of the Capital
Interests of all Members, represented in person or by proxy, shall constitute a
quorum at any meeting of Members. In the absence of a quorum at any such
meeting, a majority of the Capital Interests so represented may adjourn the
meeting from time to time for a period not to exceed 60 days without further
notice. However, if the adjournment is for more than 60 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each Member of record entitled to vote
at the meeting. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. The Members present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal during such meeting of that number of Capital Interests whose absence
would cause there to be present less than a quorum.
7.7 Manner of Acting. If a quorum is present, the affirmative vote of
Members holding a majority of the Capital Interests represented in person or by
proxy shall be the act of the Members, unless the vote of a greater or lesser
proportion or number is otherwise required by the Act, by the Articles of
Organization, or by this Joint Venture Agreement. Unless otherwise expressly
provided herein or required under applicable law, Members who have an interest
(economic or otherwise) in the outcome of any particular matter upon which the
Members vote or consent may vote or consent upon any such matter and their
Capital Interest, vote or consent, as the case may be, shall be counted in the
determination of whether the requisite matter was approved by the Members.
7.8 Proxies. At all meetings of Members a Member may vote in person or
by proxy executed in writing by the Member or by a duly authorized
attorney-in-fact. Such proxy shall be filed with the Manager before or at the
time of the meeting. No proxy shall be valid after eleven months from the date
of its execution, unless otherwise provided in the proxy.
7.9 Action by Members Without a Meeting. Action required or permitted
to be taken at a meeting of Members may be taken without a meeting if the action
is evidenced by one or more written consents describing the action taken, signed
by a sufficient number of Members or Members holding the requisite Capital
Interests, as applicable, whose vote is necessary for the taking of the action
described therein and delivered to the Manager for inclusion in the minutes or
for filing with the Company records. Action taken under this Section is
effective when Members in the requisite number or holding the requisite Capital
Interests, as applicable, have signed the consent, unless the consent specifies
a different effective date. The record date for determining Members entitled to
take action without a meeting shall be the date the first Member signs a written
consent.
7.10 Waiver of Notice. When any notice is required to be given to any
Member, a waiver thereof in writing signed by the person entitled to such
notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of such notice. Attendance at any meeting shall
constitute a waiver of notice unless there has been made a proper objection to
the meeting or to the items that are to be discussed.
7.11 Stalemates or Impasses. In the event the Management Committee is
deadlocked on any issue, a Member may request that the stalemate or impasse be
resolved by appeal to the Chief Executive Officer of the Members who shall then
attempt to resolve the stalemate or impasse. In the event the Members' Chief
Executive Officers cannot resolve the stalemate or impasse, resort will then be
had to a single arbitrator who shall be agreed to by the Chief Executive
Officers of the Members. Such arbitration shall take place in accordance with
the Rules and Regulations of the American Arbitration Association. Such
arbitration decision shall be final and binding on the parties and judgement may
be entered upon the arbitration decision or award in accordance with applicable
law in any court of competent jurisdiction. The arbitrator appointed shall be an
individual knowledgeable about public accountancy. The arbitration shall be held
in Augusta, Maine, unless otherwise agreed by the Members and the arbitrators
shall set a schedule to resolve the dispute within ninety (90) days of the panel
arbitrator being chosen. Each party shall share equally the costs and fees of
such arbitration, including compensation to the arbitrator for his or her time
spent in arriving at a determination. The award rendered by the arbitrator shall
be final and binding, and judgment may be entered upon the award in accordance
with applicable law in any court of competent jurisdiction. The parties agree to
use all means available to resolve disputes before resorting to arbitration.
7.12 Frequency of Meetings. Except as otherwise required by the Act,
the Management Committee is not required to conduct annual or other regular
meetings. A special meeting of the Management Committee may be called for any
purpose or purposes at any time by one or more members of the Management
Committee. The Person calling the special meeting shall give notice of such
meeting, complying with Section 7.13.
7.13 Notice of Meetings; Management Committee. Written notice of each
meeting of the Management Committee, stating the date, time, place and the
purpose or purposes, must be given to each member of the Management Committee at
least five (5) business days prior to the meeting. The business transacted at
each meeting of the Management Committee is limited to the purposes stated in
the notice of the meeting.
7.14 Location and Conduct of the Meetings; Adjournments. (a) Each
meeting of the Management Committee will be held at the Company's principal
place of business or at some other location agreed to by the Management
Committee.
(b) A Person chosen by the members of the Management Committee from
time to time will chair all meetings of the Management Committee.
(c) Any meeting of the Management Committee may be adjourned from time
to time to another date and time or to another place. If at the time of
adjournment the Person chairing the meeting announces the date, time, and place
at which the meeting will be reconvened, it is not necessary to give any further
notice of the reconvening.
(d) Any one or more of the members of the Management Committee may
participate in a meeting of the Management Committee by means of a
teleconference or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting.
7.15 Waiver of Notice. (a) A member of the Management Committee may
waive notice of the date, time, place, and purpose or purposes of a meeting of
the Management Committee. A waiver may be made before, at, or after the meeting,
in writing, orally, or by attendance.
(b) Attendance by a member of the Management Committee at a meeting is
a waiver of notice of that meeting, unless such member objects at the beginning
of the meeting to the transaction of business because the meeting is not
properly called or convened, or objects before a vote on an item of business
because the item may not properly be considered at that meeting and does not
participate in the consideration of the item at that meeting.
7.16 Proxies. A member of the Management Committee may cast or
authorize the casting of a vote by filing a written appointment of a revocable
proxy with the Company at or before the meeting at which the appointment is to
be effective. Such member may sign or authorize the written appointment by fax,
or other means of electronic transmission stating, or submitted with information
sufficient to determine, that such member authorized the transmission. Any copy,
facsimile, telecommunication, or other reproduction of the original of either
the writing or the transmission may be used in lieu of the original, if it is a
complete and legible reproduction of the entire original.
7.17 Quorum; Management Committee. For any meeting of the Management
Committee, a quorum consists of a majority of the members of the Management
Committee. If the departure of a member originally present leaves less than the
proportion otherwise required for a quorum, the members present may continue to
transact business.
7.18 Action by Management Committee Without a Meeting. Any action
required or permitted to be taken at a meeting of the Management Committee may
be taken without a meeting by written action signed by all the members of the
Management Committee. The written action is effective when signed by all of the
members of the Management Committee, unless a different effective time is
provided therein.
ARTICLE VIII
CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS
8.1 Members' Initial Capital Contributions. Each Member shall be
obligated to contribute the amount of capital and, if applicable, other property
set forth on Exhibit A hereto as its initial Capital Contribution; provided,
however, from a timing perspective, an individual Member shall not be required
to actually make all or any portion of its initial Capital Contribution to the
Company until such time as the Management Committee determines that all or, from
time to time, that some portion of the initial Capital Contribution shall be
made by each Member and further determines the date by which such initial
Capital Contribution or portion of the initial Capital Contribution shall be
required to be made. Except as otherwise determined by the Management Committee,
the initial Capital Contribution or portions thereof shall be made in cash, as
set forth in Exhibit A. Each member shall be required to make Capital
Contributions in equal amounts when called upon to make the initial Capital
Contribution(s)
8.2 Additional Capital Contributions. No Member shall be required to
make any Capital Contribution in addition to those contemplated by Section 8.1.
No Member shall be permitted to make any Capital Contributions in addition to
those contemplated by Section 8.1 hereof unless Members holding a Majority
Interest vote to permit such additional Capital Contributions. In the event that
Members holding a Majority Interest vote to permit additional Capital
Contributions as provided herein, the Members shall have the opportunity (but
not the obligation) to participate in such additional Capital Contributions on a
pro rata basis in accordance with their Capital Interests. No additional Capital
Contributions may be made other than in cash without the approval of Members
holding a Majority Interest. In the event some Members make additional Capital
Contributions in accordance with this Agreement and other Members do not, the
non-contributing Members' Membership Interest shall be diluted. Dilution shall
be based upon the Capital Account balance at the time additional Capital
Contributions are made. A Member's Units of Membership and its allocation of the
Net Profits and Net Losses of the Company shall be adjusted proportionally to
the relative positive Capital Accounts of the Members at the time any additional
Capital Contributions are made.
Anything to the contrary contained herein notwithstanding, in the event
that the Manager reasonably determines that the Company's cash reserves and
reasonably anticipated revenues are less than its budgeted working capital needs
during the succeeding six (6) months, the Manager shall be empowered to seek
additional Capital Contributions from the Members sufficient in the reasonable
judgment of the Manager to fund the anticipated shortfall.
8.3 Capital Accounts.
(a) A separate Capital Account shall be maintained for each Member in
accordance with the capital accounting rules of Section 704(b) of the Code. The
beginning balance in each Member's Capital Account shall be the amount of such
Member's initial Capital Contribution made pursuant to Section 8.1 above (as set
forth on Exhibit A hereto). Thereafter, a Member's Capital Account shall be
credited with (i) the amount of any subsequent Capital Contribution to the
Company by such Member; (ii) such Member's distributive share of items of
Company income and gain; and (iii) such other amounts as may be required for the
Capital Account to be determined and maintained in accordance with the rules of
Section 1.704-1(b)(2)(iv) of the Treasury Regulations (including Section
1.704-1(b)(2)(iv)(g) thereof). A Member's Capital Account shall be debited with
(i) such Member's distributive share of items of Company loss and deduction;
(ii) the amount of cash or the fair market value of any property distributed
from the Company to such Member (reduced by the amount of debt, if any, assumed
by such Member in connection with the distribution); and (iii) such other
amounts as may be required for the Capital Account to be determined and
maintained in accordance with the rules of Section 1.704-1(b)(2)(iv) of the
Treasury Regulations (including Section 1.704-1(b)(2)(iv)(g) thereof). It is the
parties' specific intent that Capital Accounts shall be maintained in accordance
with the capital account maintenance rules contained in section 704(b) of the
Code, including the regulations thereunder, and this Section 8.3(a) shall be
construed and applied to achieve such result.
(b) Upon liquidation of the Company (or any Member's Membership
Interest), liquidating distributions will be made in accordance with the
positive Capital Account balances of the Members, as determined after taking
into account all Capital Account adjustments for the Company's taxable year
during which the liquidation occurs. Liquidation proceeds will be paid in
accordance with Section 12.3 herein. The Company may offset damages for breach
of this Joint Venture Agreement by a Member whose interest is liquidated (either
upon the withdrawal of the Member or the liquidation of the Company) against any
other amount otherwise distributable to such Member.
(c) Except as otherwise required in the Act (and subject to Sections
8.1 and 8.2 herein), no Member shall have any liability to restore all or any
portion of a deficit balance in such Member's Capital Account.
8.4 Withdrawal or Reduction of Members' Contributions to Capital.
(a) A Member shall not receive out of the Company's property any part
of its Capital Contribution until all liabilities of the Company, except
liabilities to Members on account of their Capital Contributions, have been
paid.
(b) A Member, irrespective of the nature of its Capital Contribution,
has only the right to demand and receive cash in return for its Capital
Contribution.
(c) A Member may choose to withdraw by voluntary act from the Company
pursuant to section 692(3) of the Act, but the parties agree that such act shall
constitute a breach of this Joint Venture Agreement and, notwithstanding the
other provisions of this Agreement, such withdrawal shall entitle the
non-withdrawing Member(s) to recover any amounts owed by such withdrawing Member
to the date of such voluntary withdrawal. Provided further, the Member who is
voluntarily withdrawing shall remain obligated for any liabilities, including
liability for claims or damages that exist as of the date of the voluntary
withdrawal.
8.5 Debt/Equity Ratio. The Management Committee will make all
determinations relative to the debt/equity ratio of the Company and concerning
how debt may be issued, acquired, retired, cancelled or re-acquired by the
Company.
ARTICLE IX
ALLOCATIONS, INCOME TAX, DISTRIBUTIONS,
ELECTIONS, AND REPORTS
9.1 Allocations of Profits and Losses from Operations. The Net Profits
and Net Losses of the Company for each Fiscal Year will be allocated among the
Members in proportion to the Units of Membership Interest held by Members.
9.2 Special Allocations to Capital Accounts and Certain Other Income
Tax Allocations. Notwithstanding Section 9.1 hereof:
(a) In the event any Member unexpectedly receives any adjustments,
allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4),
(5), or (6) of the Treasury Regulations, which create or increase a Deficit
Capital Account of such Member, then items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such year and, if necessary, for subsequent years)
shall be specially allocated to such Member in an amount and manner sufficient
to eliminate, to the extent required by the Treasury Regulations, the Deficit
Capital Account so created as quickly as possible. It is the parties' intent
that this Section 9.02(a) be interpreted to comply with the alternate test for
economic effect set forth in Section 1.704-1(b)(2)(ii)(d) of the Treasury
Regulations.
(b) In the event any Member would have a Deficit Capital Account at the
end of any Company taxable year which is in excess of the sum of any amount that
such Member is obligated to restore to the Company under Section
1.704-1(b)(2)(ii)(c) of the Treasury Regulations and such Member's share of
minimum gain as defined in Section 1.704-2(g)(1) of the Treasury Regulations
(which is also treated as an obligation to restore in accordance with Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations), the Capital Account of such
Member shall be specially credited with items of Membership income (including
gross income) and gain in the amount of such excess as quickly as possible.
(c) Notwithstanding any other provision of this Section 9.2, if there
is a net decrease in the Company's minimum gain as defined in Treasury
Regulation Section 1.704-2(d) during a taxable year of the Company, then the
Capital Accounts of each Member shall be allocated items of income (including
gross income) and gain for such year (and if necessary for subsequent years)
equal to that member's share of the net decrease in Company minimum gain. This
Section 9.2(c) is intended to comply with the minimum gain charge-back
requirement of Section 1.704-2 of the Treasury Regulations and shall be
interpreted consistently therewith. If in any taxable year that the Company has
a net decrease in the Company's minimum gain, if the minimum gain charge-back
requirement would cause a distortion in the economic arrangement among the
Members and it is not expected that the Company will have sufficient other
income to correct that distortion, the Manager may in its discretion (and shall,
if requested to do so by a Member) seek to have the Internal Revenue Service
waive the minimum gain charge-back requirement in accordance with Treasury
Regulation Section 1.704-2(f)(4).
(d) Items of Company loss, deduction, and expenditures described in
Section 705(a)(2)(B) of the Code that are attributable to any non-recourse debt
of the Company and are characterized as partner (Member) non-recourse deductions
under Section 1.704-2(i) of the Treasury Regulations shall be allocated to the
Members' Capital Accounts in accordance with said Section 1.704-2(i) of the
Treasury Regulations.
(e) Beginning in the first taxable year in which there are allocations
of "nonrecourse deductions" (as described in Section 1.704-2(b) of the Treasury
Regulations), such deductions shall be allocated to the Members in the same
manner as Net Profit or Net Loss is allocated for such period.
(f) In accordance with Section 704(c)(1)(A) of the Code and Section
1.704(b)(2)(i)(iv) of the Treasury Regulations, if a Member contributes property
with a fair market value that differs from its adjusted basis at the time of
contribution, income, gain, loss, and deductions with respect to the property
shall, solely for federal income tax purposes (and not for Capital Account
purposes), be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company and its fair market
value at the time of contribution.
(g) Any credit or charge to the Capital Accounts of the Members
pursuant to Sections 9.2 (a), (b), (c), (d), and/or (e) hereof shall be taken
into account in computing subsequent allocations of profits and losses pursuant
to Section 9.1, so that the net amount of any items charged or credited to
Capital Accounts pursuant to Sections 9.1 and 9.2 (a), (b), (c), (d), and/or (e)
shall to the extent possible, be equal to the net amount that would have been
allocated to the Capital Account of each Member pursuant to the provisions of
this Article IX if the special allocations required by Sections 9.2 (a), (b),
(c), (d), and/or (e) hereof had not occurred.
9.3 Distributions. Except as provided in Section 8.3(d), all
distributions of Distributable Cash shall be made to the Members pro rata in
proportion to the respective interests of the Members in Net Profits and Net
Losses as set forth in Section 9.1 on the record date of such distribution.
Except as provided in Section 9.4, all distributions of Distributable Cash and
property shall be made at such time as determined by a majority of the members
of the Management Committee. All amounts withheld pursuant to the Code or any
provisions of state or local tax law with respect to any payment or distribution
to the Members from the Company shall be treated as amounts distributed to the
relevant Member or Members pursuant to this Section 9.3.
9.4 Limitation Upon Distributions. No distribution shall be declared
and paid if, in the determination of a majority of the members of the Management
Committee after giving effect to the distribution:
(a) the Company would not able to pay its debts as they become due in
the usual course of business; or
(b) all liabilities of the Company, other than liabilities to Members
on account of their Membership Interests and liabilities for which the recourse
of creditors is limited to specified property of the Company, would exceed the
fair value of the Company's assets, except that the fair value of property that
is subject to a liability for which the recourse of creditors is limited shall
be included in the Company's assets only to the extent the fair value of that
property exceeds that liability.
As contemplated by Section 675(2) of the Act, the members of the
Management Committee may base the determination under this Section on either:
(a) financial statements prepared on the basis of accounting practices
and principles that are reasonable under the circumstances; or
(b) a fair valuation or other method that is reasonable under the
circumstances.
The members of the Management Committee shall make their determination
under this Section and authorize any distribution which they elect to make under
Section 9.3 hereof in accordance with the standards of Section 657 of the Act
and not more than 120 days prior to the date the distribution is made.
In the event that the members of the Management Committee elect to make
a distribution in the form of indebtedness of the Company, their determination
under this Section 9.4 must be made not more than 120 days before each payment
of principal or interest thereunder, as contemplated by Section 675(6) of the
Act.
9.5 Accounting Principles. The profits and losses of the Company shall
be determined in accordance with generally accepted accounting principles
applied on a consistent basis using the accrual method of accounting.
9.6 Interest On and Return of Capital Contributions. No Member shall be
entitled to interest on its Capital Contribution or to return of its Capital
Contribution, except as otherwise specifically provided for herein.
9.7 Accounting Period. The Company's accounting period shall be the
calendar year.
9.8 Records and Reports. At the expense of the Company, the Manager
shall maintain records and accounts of all operations and expenditures of the
Company. As contemplated by Section 655(1) of the Act, at a minimum the Company
shall keep at its principal place of business the following records and shall be
prepared to make such records available to regulatory agencies as may be
required by law:
(a) a current list and a past list with the full names and last known
mailing addresses of each Member and each member of the Management Committee;
(b) a copy of the Articles of Organization and all amendments thereto,
together with executed copies of any powers of attorney pursuant to which any
Articles of Organization, or amendments thereto, or certificates have been
executed;
(c) copies of the Company's federal, state, and local income tax
returns and financial statements for the six most recent years;
(d) copies of the current and all past written Joint Venture Agreements
of the Company, including all amendments thereto;
(e) a writing setting forth the amount of cash and the agreed value of
other property or services contributed by each Member;
(f) copies of any separate agreements pertaining to a Member's
obligation to contribute cash, property, or services; and
(g) minutes of meetings of the Members, the Management Committee, or
the Manager and any written consents obtained from Members, the Management
Committee, or the Manager in lieu of a meeting; and
(h) such other records as the Management Committee deems appropriate.
9.9 Returns and other Elections. The Manager shall cause the
preparation and timely filing of all tax returns required to be filed by the
Company pursuant to the Code and all other tax returns deemed necessary and
required in each jurisdiction in which the Company does business. Copies of such
returns, or pertinent information therefrom, shall be furnished to the Members
within a reasonable time after the end of the Company's Fiscal Year.
All elections permitted to be made by the Company under federal or
state laws shall be made by the Manager in its sole discretion, provided that
the Manager shall make any tax election requested by Members owning a Majority
Interest.
ARTICLE X
TRANSFERABILITY
10.1 General. Except as otherwise specifically provided herein, without
the affirmative vote of Members holding a two-thirds of the Capital Interests of
all Members (excluding the Capital Interest of the transferring Member) shall
not have the right to sell, assign, transfer, exchange, or otherwise transfer
for consideration (collectively, "sell" or "sale"), whether or not by operation
of law, all or any part of its Membership Interest.
Notwithstanding the foregoing, no such vote shall be required in order
for a Member to sell all or any part of its Membership Interest and it shall be
permissible for a member to sell, assign or transfer its Membership Interest
and/or this Agreement to any wholly-owned subsidiary or to any wholly-owned
subsidiary thereof or in connection with any merger or consolidation to which it
is the surviving party, a sale of substantially all of its natural gas assets,
or any reorganization, recapitalization, or similar transaction involving such
Member, it being the understanding of the parties that both parties are in the
process of corporate reorganizations for the purpose of forming a holding
company under the Public Utility Holding Company Act of 1935 whereby the parties
hereunder would become wholly-owned subsidiaries of a holding company. It shall
be specifically permissible for the parties to become wholly-owned subsidiaries
of such holding company or to become wholly-owned subsidiaries of any such
subsidiary of any such holding company by transfer of Membership Interests or
assignment of this Agreement and it shall be specifically permissible for a
Member to sell, transfer or assign its Membership Interest and/or this Agreement
to a new corporation or other entity to be formed which would become the
wholly-owned subsidiary or the wholly-owned subsidiary of any such subsidiary of
the holding company that is or may be formed. Provided further, in the event of
a transfer by a Member to any such wholly-owned subsidiary or a transfer that
may occur in connection with any merger or consolidation where the Member is the
surviving entity, or a sale of substantially all of the transferring Members'
natural gas assets, or any reorganization, recapitalization, or similar
transaction involving such transferring Member or relating to the establishment
of a holding company structure, the Right of First Refusal Provisions of Article
10.2 shall not apply.
Each Member hereby acknowledges the reasonableness of the restrictions
on sale and gift of Membership Interests imposed by this Joint Venture Agreement
in view of the Company's purposes and the relationship of the Members.
Accordingly, the restrictions on sale and gift contained herein shall be
specifically enforceable. In the event that any Member pledges or otherwise
encumbers any of its Membership Interest as security for repayment of a
liability, any such pledge or hypothecation shall be made pursuant to a pledge
or hypothecation agreement that requires the pledgee or secured party to be
bound by all the terms and conditions of this Article X.
10.2 Right of First Refusal.
(a) A Selling Member that desires to sell all or any portion of its
Membership Interest in the Company to a qualified third party purchaser shall
obtain from such third party purchaser a bona fide written offer to purchase
such interest, stating the terms and conditions upon which the purchase is to be
made and the consideration offered therefor. The Selling Member shall give
written notification to the other Member, by certified mail or personal
delivery, of its intention to so transfer such interest, which other Member
shall have the right to purchase all (but not less than all) of the interest
proposed to be sold by the Selling Member upon the same terms and conditions as
stated in the aforesaid written offer to purchase by giving written notification
to the Selling Member, by certified mail or personal delivery, of its intention
to do so within thirty (30) days after receipt by such other Member of written
notice from the Selling Member. If the non-selling Member fails to so notify the
Selling Member of its desire to exercise this right of first refusal within said
period, the right of first refusal as to such offer shall terminate and the
Selling Member shall be entitled to consummate the sale of its interest in the
Company to such third party purchaser on the terms set forth in the notice given
to the non-selling Member.
In the event the non-selling Member gives written notice to the Selling
Member of its desire to exercise this right of first refusal and to purchase all
of the Selling Member's interest in the Company, which the Selling Member
desires to sell upon the same terms and conditions as are stated in the
aforesaid written offer to purchase, the non-selling Member shall have the right
to designate the time, date, and place of closing, provided that the date of
closing shall be within the later of sixty (60) days after receipt by the
non-selling Member of written notification from the Selling Member of the third
party offer to purchase or sixty (60) days of receipt of any required regulatory
approval for such transfer.
(b) In the event of the purchase of the Selling Member's interest in
the Company by a third party purchaser, and as a condition to recognizing one or
more of the effectiveness and binding nature of any such sale and (subject to
Section 10.3 below) substitution of a new Member as against the Company or
otherwise, the non-transferring Member may require the Selling Member and the
proposed purchaser to execute, acknowledge, and deliver to the Company such
instruments of transfer, assignment, and assumption and such other certificates,
representations, and documents, and to perform all such other acts, which the
non-transferring Member may reasonably deem necessary or desirable to:
(i) constitute such purchaser as a Member;
(ii) confirm that the person to be admitted as a Member, has
accepted, assumed, and agreed to be subject and bound by all of the
terms, obligations, and conditions of the Joint Venture Agreement, as
the same may have been further amended;
(iii) preserve the status of the Company as a foreign or
domestic limited liability company after the completion of such sale,
transfer, assignment, or substitution under the laws of each
jurisdiction in which the Company is qualified, organized, or does
business;
(iv) maintain the status of the Company as a partnership for
federal tax purposes; and
(v) assure compliance with any applicable state and federal
laws, including, without limitation, securities laws and regulations.
(d) Any sale of a Membership Interest in compliance with this Article X
shall be deemed effective as of the last day of the calendar month in which the
remaining Member's consent thereto was given, or, if no such consent was
required pursuant to Section 10.3, then on such date that the successor in
interest complies with Section 10.2(c). The Transferring Member agrees, upon
request of the non-transferring Member, to execute such certificates or other
documents and perform such other acts as may be reasonably requested by the
non-transferring Member from time to time in connection with such sale,
transfer, assignment, or substitution. The Transferring Member hereby
indemnifies the Company and the remaining Members against any and all loss,
damage, or expense (including, without limitation, tax liabilities or loss of
tax benefits) arising directly or indirectly as a result of any transfer or
purported transfer in violation of this Article X.
(e) The provisions of this Section 10.2 shall be inapplicable to a
transfer described in the second paragraph of Section 10.1 hereof.
10.3 Transfers by Operation of Law.
(a) In the event that a Member (i) files a voluntary petition under
any bankruptcy or insolvency law, or a petition for the appointment of a
receiver, or makes an assignment for the benefit of creditors, or (ii) is
subjected involuntarily to such a petition or assignment, or to an attachment or
other legal or equitable interest with respect to its Membership in the Company,
and such involuntary petition, or assignment, attachment, or other interest is
not discharged within ninety (90) days after its date, or (iii) is otherwise
subject to a transfer of its Membership Interest by operation of law or pursuant
to judicial decree or settlement of judicial proceedings, said Member shall be
deemed to have offered all of its Membership Interest to the other Member as
provided in this Section 10.3. Such offer shall be irrevocable for a period of
ninety (90) days and within said time period the other Member may, by delivering
a written notice of acceptance to such Member, accept the offer in respect of
all, but not less than all, of said Membership Interest. If the other Member
does not notify said selling Member of its decision in respect of the Membership
Interest within the applicable ninety (90) day offering period, said offer to
sell shall be deemed not to have been accepted by the other Member.
(b) Purchase Price. The purchase price at which the other Member may
elect to purchase a Membership Interest hereunder shall be the fair market value
of the selling party's Membership Interest, as mutually agreed to by the
Members, or, failing such agreement, the fair market value shall be determined
in accordance with the procedures for resolving Stalemates and Impasses as set
forth in Section 7.11.
(c) Payment of Purchase Price. If the other Member elects to purchase a
Membership Interest in accordance with the provisions of this Section 10.3,
transfer of said Membership Interest shall be made at the office of the Company
on a mutually satisfactory business day within the later of thirty (30) days of
acceptance of the offer to sell by the other Member or thirty (30 days of
receipt of any required regulatory approvals for such transfer. Delivery of
instruments evidencing such transfer to the other Member, shall be made upon
receipt by the selling Member of cash representing the aggregate purchase price
for the Membership Interest or, at the option of the purchaser, of a promissory
note for the purchase price substantially in the form attached hereto as Exhibit
B hereto.
ARTICLE XI
ADDITIONAL MEMBERS
No new Members shall be entitled to any retroactive allocation of
losses, income, or expense deductions incurred by the Company. The Manager may,
at its option, at the time a Member is admitted, close the Company books (as
though the Company's tax year had ended) or make pro rata allocations of loss,
income, and expense deductions to a new Member for that portion of the Company's
tax year in which a Member was admitted in accordance with the provisions of
Section 706(d) of the Code and the Treasury Regulations promulgated thereunder.
ARTICLE XII
DISSOLUTION AND TERMINATION
12.1 Dissolution.
(a) The Company shall be dissolved upon the occurrence of any of the
following events:
(i) the written agreement of Members holding a Majority
Interest; or
(ii) the sale or other disposition of all or substantially all
of the assets of the Company or the permanent cessation of the
Company's business operations.
(b) As soon as possible following the occurrence of any of the events
specified in this Section 12.1 effecting the dissolution of the Company, the
appropriate representative of the Company shall execute a statement of intent to
dissolve in such form as shall be prescribed by the Act and file same with the
office of the Secretary of State.
12.2 Effect of Filing of Dissolving Statement. Upon the filing of a
statement of intent to dissolve with the Secretary of State, the Company shall
cease to carry on its business, except insofar as may be necessary for the
winding up of its business, but its separate existence shall continue until a
certificate of cancellation has been issued by the Secretary of State or until a
decree dissolving the Company has been entered by a court of competent
jurisdiction.
12.3 Winding Up, Liquidation, and Distribution of Assets.
(a) Upon dissolution, the Manager shall immediately proceed to wind up
the affairs of the Company in accordance with the requirements of the Act and
other applicable law. In furtherance of the winding up of the Company, the
Manager shall:
(i) sell or otherwise liquidate all of the Company's assets as
promptly as practicable (except to the extent the Manager may determine
to distribute any assets to the Members in kind);
(ii) discharge or make reasonable provision for all
liabilities of the Company, including liabilities to Members who are
also creditors (other than liabilities to Members for distributions and
the return of capital) and establish such Reserves as may be reasonably
necessary to provide for contingent liabilities of the Company (for
purposes of determining the Capital Accounts of the Members, the
amounts of such Reserves shall be deemed to be an expense of the
Company);
(iii) distribute the remaining assets of the Company in the
following order of priority:
(1) To each Member, with respect to the cumulative
amount of all accrued but unpaid pre-dissolution distributions
for which the Company is liable to such Member, the amount of
such liability;
(2) The balance of any remaining assets shall be
distributed to each Member in accordance with the Members'
Capital Account balance, after giving effect to contributions,
allocations, and distributions for all periods.
(b) The Members shall cause an accounting to be made by the Company's
independent accountants of the accounts of the Company and of the Company's
assets, liabilities and operations, from the date of the last previous
accounting until the date of dissolution.
(c) If any assets of the Company are distributed in kind, the net fair
market value of such assets as of the date of dissolution shall be determined by
independent appraisal or by agreement of the Members. Such assets shall be
deemed to have been sold to the Members in proportion to their Capital Interests
as of the date of dissolution for their fair market value, and the Capital
Accounts of the Members shall be adjusted to reflect such deemed sale.
(d) Notwithstanding anything to the contrary in this Agreement, upon a
liquidation, if any Member has a Deficit Capital Account (after giving effect to
all contributions, distributions, allocations, and other Capital Account
adjustments for all taxable years, including the year during which such
liquidation occurs), such Member shall have no obligation to make any Capital
Contribution, and the negative balance of such Member's Capital Account shall
not be considered a debt owed by such Member to the Company or to any other
person for any purpose whatsoever.
12.4 Certificate of Cancellation. Upon completion of the winding up,
liquidation, and distribution of the assets, the Company shall be deemed
terminated and the Manager shall forthwith file with the Secretary of State a
certificate of cancellation. Thereafter, the Manager, as liquidating trustees,
shall have authority to distribute any Company property discovered after
termination, convey real estate and take such other action as may be necessary
on behalf of and in the name of the Company.
12.5 Return of Capital Contribution - Nonrecourse. Except as provided
by law or as expressly provided in this Agreement, upon dissolution, each Member
shall look solely to the assets of the Company for the return of his Capital
Contribution. If the Company property remaining after the payment or discharge
of the debts and liabilities of the Company is insufficient to return the
Capital Contribution of a Member, such Member shall have no recourse against any
other Member.
12.6 Breach of Joint Venture Agreement; Remedies; Survival. The parties
agree and acknowledge that, in addition to any other remedies specifically set
forth herein, in the event of a breach of any provision of this Joint Venture
Agreement by a Member, the Company and the non-breaching Members shall be
entitled to receive from the breaching Member any and all damages suffered by
them as a result of such breach, together with all expenses incurred in
connection with the enforcement of this Joint Venture Agreement and the
collection of such damages, including reasonable attorneys' fees. Without
limitation of any other means of recourse, in order to collect any amounts owing
hereunder, the Company and such non-breaching Members shall be entitled to set
off against, withhold, proceed against, or collect or receive directly from the
Company, as applicable, all or any part of the breaching Member's Membership
Interest, any distributions with respect thereto and, following the withdrawal
of such Member or the dissolution of the Company, any amounts payable to the
breaching Member pursuant to this Joint Venture Agreement. The obligations of
the Members hereunder shall survive the withdrawal of any Member and the
dissolution or termination of the Company.
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES
Each Member hereby represents and warrants to the other as follows:
(a) It has been duly incorporated and is validly existing and in good
standing under the laws of its state of incorporation, and is duly qualified to
conduct business as a foreign corporation in each jurisdiction in which such
qualification is required.
(b) The execution and delivery by it of this Agreement, and the
performance of its obligations hereunder, have been duly authorized by all
necessary corporation action, and upon the receipt of Board of Directors' and
necessary regulatory approvals as set forth in Section 2.1, do not conflict with
or violate any of its constituent documents or any agreement or instrument to
which it is a party or by which it or its properties are subject and do not
violate, or conflict with, or result in a breach of or constitute a default
under, or result in the creation of a right of cancellation under, or result in
the impairment of any right of or result in the creation or imposition of any
lien upon the party under any mortgage, indenture, agreement, instrument,
judgment, statute, law, decree, court order, writ, injunction, permit,
regulation or rule to which it is a party or by which it is bound.
(c) There are no actions, suits, claims, proceedings, investigations or
inquiries pending or, to the best knowledge of the party's knowledge threatened
against it, or against any of its officers or employees which (i) seek to
prevent the acquisition of an interest in the Company or the other transactions
contemplated hereby; or (ii) call into question the validity, or materially
hinder the enforceability or performance of this Agreement. To the best
knowledge of a party, after due inquiry, there are no events or conditions which
would provide the basis for any such litigation, proceeding or investigation.
(d) Neither party has employed any broker or finder or incurred any
liability for any brokerage fees, commissions, or finders' fees in connection
with the acquisition of an interest in the Company or the other transactions
contemplated by this Agreement.
(e) Neither party nor any of its Affiliates is, nor will the Company as
a result of holding an interest in the Company be, an "investment company" as
defined in, or subject to regulation under, the Investment Company Act of 1940.
(f) Each party is acquiring its interest in the Company based upon its
own investigation, and the exercise by a party of its rights and the performance
of its obligations under this Agreement will be based upon its own
investigation, analysis and expertise. Each party's acquisition of its interest
in the Company is being made for its own account for investment, and not with a
view to the sale or distribution thereof.
(g) No representation or warranty by a party contained in this
Agreement (including, but not limited to, the Exhibits and Schedules hereto)
contains or will contain any untrue statement of a material fact, or omits or
will omit to state any material fact required to make the statements contained
herein or therein not misleading.
ARTICLE XIV
ARBITRATION AND INJUNCTION
Any and all disputes arising out of, under, in connection with, or
relating to this Joint Venture Agreement, the breach or any alleged breach
thereof, including disputes regarding the Capital Accounts, shall be settled in
accordance with the procedures and structure established for handling stalemates
or impasses, as set forth in Paragraph 7.11. Because of the unique relationship
of the Members in the Company and the unique value of their interests therein,
this provision for arbitration shall not prevent any party from applying for and
obtaining injunctive relief (i) as provided in Section 12.6, or (ii) in
instances where, in the absence thereof, the rights of such party cannot be
adequately protected by an arbitrator's award.
ARTICLE XV
RELATIONSHIP OF THE PARTIES
15.1 The parties agree not to compete with one another in developing,
owning, and operating a natural gas local distribution company to customers in
Maine and to customers in the proximity of PNGTS and/or Maritimes in New
Hampshire. For the purposes of this Agreement, the phrase "agrees not to
compete" means that neither party will, for any reason, voluntarily or
involuntarily, without the prior written consent of the other party, directly or
indirectly, acquire any interest in or otherwise act, with or without
compensation, during the term of the Agreement and for a period of three (3)
years following termination of this Agreement, or following any withdrawal,
transfer or assignment of this Agreement or its Membership Interest therein, for
itself or any corporation, entity, or business that is at the time involved in
the ownership, development, or operation of a natural gas local distribution
company in Maine and New Hampshire. The parties agree that such limitation on
competition is reasonable.
15.2 Until the expiration of three (3) years after either party ceases
to be a Member of the Company, no party nor their respective Affiliates will
newly employ, engage or seek to employ or engage, directly or indirectly, any
employee of the Company or any employee of the remaining Members of the Company
who are providing services to the Company without the written consent of the
Company, unless such employee has been discharged by the Company or by such
Member or such employee is employed by an entity that is acquired by a Party or
one of its Affiliates; provided, however, that the foregoing provisions shall
not apply to any employment or solicitation of employment by a previous employer
(or its Affiliates) of an employee of the Company.
15.3 The Parties will insure that the Company and its Subsidiaries will
not employ, engage or seek to employ or engage, directly or indirectly, any
employee of a Party or of an Affiliate thereof, without the written consent of
such Party, unless such employee has been discharged by such Party or its
Affiliate or such employee is employed by an entity that is acquired, directly
or indirectly, by the Company.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
16.1 Notices. Any notice, demand, or communication required or
permitted to be given by any provision of this Joint Venture Agreement shall be
deemed to have been sufficiently given or served for all purposes if delivered
personally to the party or to an executive officer of the party to whom the same
is directed or, if sent by registered or certified mail, postage and charges
prepaid, or by facsimile, addressed to the Member's and/or Company's address, as
appropriate, which is set forth in this Joint Venture Agreement. Any such notice
given by mail shall be deemed to be given three business days after the date on
which the same was deposited in a regularly maintained receptacle for the
deposit of United States mail, addressed and sent as aforesaid.
16.2 Books of Account and Records. Proper and complete records and
books of account shall be kept or shall be caused to be kept by the Manager in
which shall be entered fully and accurately all transactions and other matters
relating to the Company's business in such detail and completeness as is
customary and usual for businesses of the type engaged in by the Company. Such
books and records shall be maintained as provided in Section 9.9. The books and
records shall be at all times be maintained at the principal executive office of
the Company and shall be open to the reasonable inspection and examination of
the Members or their duly authorized representatives, during reasonable business
hours.
16.3 Application of Maine Law. This Joint Venture Agreement, and the
application and interpretation hereof, shall be governed exclusively by its
terms and by the laws of the State of Maine, excluding conflict of laws
principles.
16.4 Amendments. Other than as expressly provided herein, this Joint
Venture Agreement may not be amended except by the written consent of each
Member.
16.5 Execution of Additional Instruments. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney, and other instruments necessary to comply with
any laws, rules, or regulations.
16.6 Construction. Whenever the singular number is used in this Joint
Venture Agreement and when required by the context the same shall include the
plural and vice versa, and the masculine gender shall include the feminine and
neuter genders and vice versa.
16.7 Headings and Pronouns. The headings in this Joint Venture
Agreement are inserted for convenience and are in no way intended to describe,
interpret, define, or limit the scope, extent, or intent of this Joint Venture
Agreement or any provision hereof. All pronouns and only variations thereof
shall be deemed to refer to masculine, feminine, or neuter, singular or plural
as the identity of the Person or Persons may require.
16.8 Waivers. The failure of any party to seek redress for violation of
or to insist upon the strict performance of any covenant or condition of this
Joint Venture Agreement shall not prevent a subsequent act, which would have
originally constituted a violation, from having the effect of an original
violation.
16.9 Rights and Remedies Cumulative. The rights and remedies provided
by this Joint Venture Agreement are cumulative and the use of any one right or
remedy by any party shall not preclude or waive the right to use any or all
other remedies. Said rights and remedies are given in addition to any other
rights the parties may have by law, statute, ordinance or otherwise.
16.10 Severability. If any provision of this Joint Venture Agreement or
the application thereof to any person or circumstance shall be invalid, illegal,
or unenforceable to any extent, the remainder of this Joint Venture Agreement
and the application there of shall not be affected and shall be enforceable to
the fullest extent permitted by law.
16.11 Heirs, Successors and Assigns. Each and all of the covenants,
terms, provisions and agreements herein contained shall be binding upon and
inure to the benefit of the parties hereto and, to the extent permitted by this
Joint Venture Agreement, their respective heirs, legal representatives,
successors and assigns.
16.12 Creditors. None of the provisions of this Joint Venture Agreement
shall be for the benefit of or enforceable by any creditors of the Company
except as required by the Act.
16.13 Counterparts. This Joint Venture Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
16.14 Integration. This Joint Venture Agreement together with a
Memorandum of Understanding between the parties and dated July 14, 1997 ("MOU")
constitute the parties' entire agreement with respect to the subject matter
hereof and thereof, and supersede any and all prior oral or written agreements
or understandings with respect thereto. To the extent of any inconsistency
between the MOU and this Agreement, this Agreement shall control.
16.15 Maine Securities Law. THE SECURITIES REPRESENTED BY MEMBERSHIP
INTERESTS IN THE COMPANY ARE BEING SOLD PURSUANT TO AN EXEMPTION FROM
REGISTRATION WITH THE BANK SUPERINTENDENT OF THE STATE OF MAINE UNDER SECTION
10502(2)(P) OF TITLE 32 OF THE MAINE REVISED STATUTES. THESE SECURITIES MAY BE
DEEMED RESTRICTED SECURITIES AND AS SUCH THE HOLDER MAY NOT BE ABLE TO RESELL
THE SECURITIES UNLESS PURSUANT TO REGISTRATION UNDER STATE OR FEDERAL SECURITIES
LAWS OR UNLESS AN EXEMPTION UNDER SUCH LAWS EXISTS.
16.16 Public Announcements. The Members agree that before they or any
of their respective Affiliates issue any press releases or otherwise make any
public statements with respect to this Agreement or issue any further press
releases or otherwise make any public statements with respect to the
transactions contemplated hereby, they will obtain the consent of each of the
other Parties hereto to such press release or public statement. Neither the
Members nor any of their Affiliates shall issue a press release or make any
public statement without such prior consent except, in each case, in the
reasonable opinion of counsel to the disclosing party, as may be required by
applicable law, rule, regulation or order or by obligations pursuant to any
listing agreement with any securities exchange on which any of its or their
securities may be listed, upon prior written notice to the other party, where
such notice is practicable.
16.17 Indemnification. Each Member agrees to indemnify and hold
harmless the Company and the other Member, and their directors, officers and
employees from and against any losses, claims, liabilities, damages, diminutions
in value of any kind, costs, penalties, interest on any amounts payable or
expenses (including reasonable attorneys' fees incurred by an indemnified party
in any action or proceeding between itself and the indemnifying party or between
the indemnified party and any third party or otherwise) incurred in connection
with investigating, pursuing or defending any claims or actions between the
Members and/or between the Members and third parties (collectively "losses")
which such Parties may sustain as a result of: (a) the non-performance of any
obligation to be performed by the other party under this Agreement; and (b) the
breach of any representation, warranty, covenant, or agreement of the other
Member contained in this Agreement for the period such representation, warranty,
covenant, or agreement shall survive hereunder.
16.18 Confidentiality. The Members agree as follows with respect to
information (whether in the form of documents, oral communications, visual
examination of facilities, or otherwise), which, in the case of tangible items
will be marked as such, disclosed by any Member to any other Member in the
course of the formation of the Company or in course of the Company's operations
(the "Confidential Information"):
(a) Subject to the exceptions set forth in Sections 16.18 (b), (c) and
(d), the Members (i) will treat all Confidential Information as confidential,
(ii) will not use Confidential Information for any purpose other than in
connection with the Business or their interest in the Company and (iii) will not
disclose any Confidential Information to third parties. Each Member shall, at
all times, be responsible for compliance by its Management Committee Members,
managers, directors, officers, employees and agents with the obligations under
this Section 16.18.
(b) The confidentiality obligations of the Members contained in Section
16.18(a) shall not apply to any Confidential Information which (i) is or becomes
publicly known through no fault of the Member receiving the Confidential
Information, (ii) is disclosed to the Party receiving the Confidential
Information on a non-confidential basis by a third party who such Party believes
after due inquiry is entitled to disclose it, (iii) the Member receiving the
Confidential Information can demonstrate on the basis of written records was
already known to it on a non-confidential basis prior to receipt, (iv) is
subsequently developed by the Member receiving the Confidential Information
independently of Confidential Information, or (v) subject to Section 16.18(c),
is required to be disclosed by law or legal process.
(c) Provided circumstances permit, each Member will provide the Company
and the other Members hereto with prior notice of each instance in which
Confidential Information is required to be disclosed by law or legal process.
Such notice shall be given as promptly as is practicable under the
circumstances.
(d) The Members shall be entitled to disclose Confidential Information
to their Affiliates, agents, financial advisors, representatives, consultants
(including, without limitation, legal counsel and accountants), lenders and
joint venture partners (if any) (collectively, the "Associated Third Parties")
as they may determine to be appropriate in connection with the Company or their
interest in the Company. In addition, the Parties shall have the right to
discuss the Business, if required, with the staff or members of regulatory
agencies which would have jurisdiction over the Company's Business or in
connection with the Member's relationship with the Company and with rating
agencies such as Standard & Poors, Moody's Investors Service or Fitch Investors
Service.
(e) The obligations of this Section 16.18 shall survive the termination
of this Agreement.
16.19 No Third Party Beneficiaries. Except as expressly provided
herein, nothing in this Agreement shall entitle any person other than the
Members or their respective successors and assigns permitted hereby to any
claim, cause of action, remedy or right of any kind.
16.20 Equitable Relief. The Members agree that irreparable damage would
occur in the event that any of the provisions of this Agreement, including,
without limitation, Section 16.18 hereof, were not performed in accordance with
their specific terms or were otherwise breached. Accordingly, it is agreed that
the Members shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and, subject to the provisions of Section 16.3, to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
16.21 Counterparts. This Agreement may be executed in any number of
counterparts, no one of which needs to be executed by all of the Members, and
this Agreement shall be binding upon all the Members with the same force and
effect as if all the Members had signed the same document, and each such signed
counterpart shall constitute an original of this Agreement.
16.22 No Partnership Created. It is the express intention of the
Members that the representations, warranties, covenants and agreement contained
in this Agreement do not create a partnership among the Parties hereto.
16.23 Audit Rights. Each Member shall be have the right, at their own
expense, upon reasonable advance notice, to audit the books and records of the
Company, and it is agreed that the Company, when formed, shall have the right,
upon reasonable advance notice, to audit the books and records of the Members
for purposes associated with the performance of the Agreements attached as
Exhibits C and D hereto.
16.24 Agreement Jointly Drafted. The Members agree that the Agreement
was jointly drafted and that no interpretive presumption shall exist against
either Member as a result of authorship of this Agreement.
16.25 Ratification by CMP Gas Company, L.L.C. The Members agree that at
such time as the Company is formed that the Members shall cause the Company to
ratify the terms and conditions of this Joint Venture Agreement and so become
subject to all of the provisions hereof.
16.26 Further Assurances. The Members agree to use their best efforts
to take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable to carry out all of their respective
obligations under this Agreement and to make effective the Contributions and the
and other transactions contemplated by this Agreement.
IN WITNESS WHEREOF, the Members have signed and sealed this Joint
Venture Agreement as of the date first written above.
MEMBERS
CENTRAL MAINE POWER COMPANY
By: David T. Flanagan
David T. Flanagan
President & CEO
NEW YORK STATE ELECTRIC & GAS CORPORATION
By: Wesley W. von Schack
Wesley W. von Schack
Chairman, President and
Chief Executive Officer
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
EXHIBIT A
TO
CMP GAS COMPANY, L.L.C.
JOINT VENTURE AGREEMENT
List of Members
Units of
Initial Capital Membership
Name Address Capital Contribution Interests (%) Interest
Central Maine Power 83 Edison Drive $10 million in cash 50.00% 100
Company Augusta, ME 04336
Attn: Darrel Quimby
New York State Electric 4500 Vestal Pkwy. East $10 million in cash 50.00% 100
& Gas Corporation Binghamton, NY 13902
Attn: Tim Kelley
</TABLE>
<PAGE>
EXHIBIT B
PROMISSORY NOTE
$---------
Portland,
Maine
[date]
FOR VALUE RECEIVED, _______________________ (the "Maker"), promises to pay
to the order of ________________________ (the "Holder") the principal sum of
___________________________________ Dollars ($__________), with interest from
the date hereof upon said principal sum, or so much thereof as from time to time
remains unpaid, at the fixed rate of ______% per annum [insert applicable
federal rate in effect at the time of delivery of the note for obligations of
like maturity]. Payment of this Note shall be made in thirty-six (36) equal
consecutive monthly payments of principal and interest of $___________ each,
commencing on _______________ and continuing on the _________ day of each
succeeding month thereafter, and in a final payment of all unpaid principal and
interest due hereunder on ___________.
The Maker may make prepayments of principal due hereunder at any time and
from time to time without payment of any penalty or premium. Any such
prepayments shall be applied, first, to any costs due hereunder to the Holder
from the Maker, second, to accrued but unpaid interest hereunder and, third, to
unpaid principal. Any partial prepayments of principal shall be applied to
remaining scheduled principal payments due hereunder in inverse order of their
due dates.
If default be made in payment of any amount due under this Note, and if
such default is not cured within fifteen (15) days after receipt by Maker of
written notice thereof, or if any kind of insolvency or bankruptcy proceeding
shall be commenced in any court of competent jurisdiction by or against the
Maker (which proceeding, in the case of a proceeding commenced against the
Maker, shall not be dismissed within ninety (90) days after filing), or if the
Maker shall be adjudicated insolvent or a bankrupt by any court of competent
jurisdiction or if the Maker shall make an assignment for the benefit of
creditors, the entire principal sum and accrued interest shall become due and
payable upon written notice, at the option of the Holder of this Note. Failure
to exercise this option shall not constitute a waiver of the right to exercise
the same in the event of any subsequent default.
Except as provided in the preceding paragraph, the Maker waives
presentment, demand, notice and protest and agrees to pay all costs of
collection or attempted collection, including reasonable attorneys' fees.
WITNESS: MAKER:
_________________ By:____________
Name:___________
Title:_______
<PAGE>
Exhibit C
SUPPORT SERVICES AGREEMENT
BETWEEN
CENTRAL MAINE POWER COMPANY
AND
CMP GAS COMPANY, L.L.C.
<PAGE>
INDEX
PAGE
ARTICLE I - General Scope of Services.................................1
ARTICLE II - Payment for Services......................................1
ARTICLE III - Term of Contract..........................................3
ARTICLE IV - Changes...................................................3
ARTICLE V - Assignment................................................3
ARTICLE VI - Force Majeure.............................................3
ARTICLE VII - Insurance and Indemnification.............................4
ARTICLE VIII- General Limitations of Liability and Waiver...............5
ARTICLE IX - Notice....................................................6
ARTICLE X - Applicable Law............................................6
EXHIBIT A
Description of Central Maine Power Company Support Services.............8
EXHIBIT B
Determination of Cost of Service and Allocation Thereof.................9
<PAGE>
SUPPORT SERVICES AGREEMENT
This Agreement is made as of __________, 199__, by and between Central
Maine Power Company, a Maine corporation with its principal place of business in
Augusta, Maine ("CMP"), and CMP Gas Company, L.L.C., a Maine Limited Liability
Company with its principal place of business in Augusta, Maine ("CMP Gas").
WHEREAS, CMP is willing to provide support services to CMP Gas; and
WHEREAS, CMP Gas requires support services and desires to use and purchase
such services from CMP; and
WHEREAS, CMP Gas is willing to provide support services to CMP.
NOW, THEREFORE, it is hereby agreed as follows:
ARTICLE I - GENERAL SCOPE OF SERVICES
1. CMP shall provide, as needed, support services to CMP Gas,
enumerated in Exhibit A, attached hereto and made a part hereof, subject to the
applicable provisions of this Agreement; provided, however, that CMP and CMP Gas
shall not be responsible for policy or management decisions of the other, such
functions being reserved exclusively for each party to this Agreement,
respectively.
2. CMP shall provide support services using personnel from within its
own organization. In addition, CMP may use persons from outside its organization
with the other party's approval, such approval not to be unreasonably withheld.
ARTICLE II - PAYMENT FOR SERVICES
1. All of the support services rendered under this Agreement shall be
charged to the other at actual cost. Support services that benefit both CMP and
CMP Gas shall be fairly and equitably allocated between the parties. The methods
of determining the costs and the allocation thereof are set forth in Exhibit B,
attached hereto and made a part hereof; provided that these methods may be
modified or changed by either party with the prior written approval of the other
party. If either party objects, in writing, to the proposed changes or
modifications, the parties agree to make a good faith effort to re-negotiate the
terms and conditions of Exhibit B. If no agreement can be reached within sixty
(60) days of the proposal to modify Exhibit B, the proposed modifications will
not take effect and either party may terminate this Agreement as provided
herein.
2. CMP shall submit itemized invoices for services rendered,
including, when requested or required by CMP Gas, all sales, use, excise, or
similar taxes that may be applicable to such services, as soon as practicable
after the close of each month. All invoices submitted by CMP shall have adequate
documentation to justify all labor and material costs. CMP Gas shall pay such
invoice within thirty days after receipt, to the extent the costs are not
disputed. Such disputes must be raised within eighteen (18) months after receipt
of the invoice with the disputed cost. Simple annual interest at the prime rate
then in effect at The First National Bank of Boston, plus 1.5%, shall accrue on
any undisputed invoice items not paid within thirty days after receipt by the
other, interest computed from the 31st day following the date of receipt.
3. Upon the written request of CMP Gas, CMP shall permit CMP Gas
reasonable access to its books and records for the purpose of auditing charges
billed by CMP.
ARTICLE III - TERM OF CONTRACT
This Agreement shall commence on the date first written above and
continue until terminated by either party by at least two (2) months prior
written notice to the other.
ARTICLE IV - CHANGES
No waiver, alteration, amendment, consent, or modification of any of
the provisions of this Agreement shall be binding unless in writing and signed
by a duly authorized representative of both parties.
ARTICLE V - ASSIGNMENT
Neither CMP nor CMP Gas may assign any of its rights or obligations
hereunder, except with the prior written consent of the other.
ARTICLE VI - FORCE MAJEURE
Force Majeure means an event that is beyond the reasonable control
of, and without the fault or negligence of, the party claiming Force Majeure,
which delays, hinders, or prevents performance of that party's obligations under
this Agreement. CMP or CMP Gas shall not be liable to the other for loss or
damage resulting from (1) any delay in performance, in whole or in part, or (2)
nonperformance of its contractual obligations, in whole or in part, insofar as
such delay or nonperformance is caused by Force Majeure, provided that the party
invoking Force Majeure provides written notice to the other party of the
circumstances giving rise to such delay or nonperformance within a reasonable
time after learning of such circumstances and, to the extent possible, takes
reasonable steps to correct or alleviate the circumstances that led to the Force
Majeure event.
ARTICLE VII - INSURANCE AND INDEMNIFICATION
1. CMP may, with respect to the services performed under this
Agreement, self-insure or obtain insurance coverage with respect to its
facilities and shall maintain the following coverage, naming the other party to
this Agreement as an additional insured, as applicable:
a) Workers' Compensation Insurance that complies with
the provisions of applicable law.
b) Employer's Liability Insurance with limits not less
than $100,000 each occurrence;
c) General Liability Insurance with limits not less than
$1,000,000 combined bodily injury and property damage
liability; and
d) Automobile Liability Insurance with limits not less
than $1,000,000 combined bodily injury and property
damage.
2. Each party shall defend (at the other's option), indemnify, and
hold harmless the other, its directors, officers, employees, contractors,
agents, successors, and assigns from and against, any actions, penalties,
claims, costs (including, but not limited to, reasonable attorney's fees), or
damages of any nature arising out of or related to the services performed
pursuant to this Agreement and shall defend the other from such claims.
ARTICLE VIII - GENERAL LIMITATIONS OF LIABILITY AND WAIVER
1. CMP shall provide well-qualified and experienced staff to perform
services covered by this Agreement. Names and backgrounds of said personnel
shall be provided to CMP Gas on request.
2. Services provided by CMP hereunder shall be performed in a
prudent, professional, and workmanlike manner. If any such services provided by
NYSEG fail to conform to this standard, CMP Gas shall, at its option, have the
right to correct or re-perform such services.
3. Except for the obligation in (2) above to correct or re-perform
services, NYSEG shall not be liable for any reason to the other for claims for
direct, incidental, indirect, consequential, or other damages of any nature
connected with or resulting from the performance or non-performance of this
Agreement by CMP or CMP Gas, whether or not due to negligence by CMP or CMP Gas.
4. Except for the obligation imposed upon it for the payment of
support services pursuant to Article III, neither party shall be liable to the
other for claims for direct, incidental, indirect, consequential, or other
damages of any nature connected with or resulting from performance or
non-performance of this Agreement by CMP or CMP Gas, whether or not due to
negligence by CMP or CMP Gas.
5. EXCEPT AS MAY BE PROVIDED IN PARAGRAPHS 1 AND 2 OF THIS ARTICLE,
NO WARRANTIES OF ANY KIND WHETHER STATUTORY, WRITTEN, ORAL OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, SHALL APPLY TO SERVICES PERFORMED HEREUNDER.
ARTICLE IX - NOTICE
1. All communications and notices by CMP Gas to CMP under this
Agreement shall be sent to and addressed as follows:
Central Maine Power Company
83 Edison Drive
Augusta, ME 04336
Attn: Darrel Quimby
<PAGE>
2. All communications and notices by CMP to CMP Gas under this
Agreement shall be sent to and addressed as follows:
CMP Gas Company, L.L.C.
4500 Vestal Parkway East
Binghamton, NY 13902-3607
Attn: Tim Kelley
3. Either party may change the address set forth by written notice to
the other.
ARTICLE X - APPLICABLE LAW
1. This Agreement shall be governed by and construed in accordance
with the laws of the State of Maine.
2. This Agreement shall be subject to approval by any regulatory body
whose approval is a legal prerequisite to its execution, delivery, or
performance.
3. This Agreement constitutes the entire Agreement between the
parties for the services to be provided hereunder, and supersedes all prior
representations and Agreements, whether written or oral, between the parties as
to such services.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their duly authorized representatives, to become
effective as of the date first written above.
CENTRAL MAINE POWER COMPANY
By:
Its:
<PAGE>
CMP GAS COMPANY, L.L.C.
By:
Its:
<PAGE>
EXHIBIT A
GENERAL DESCRIPTION OF CENTRAL MAINE POWER COMPANY
SUPPORT SERVICES
The services available under this Agreement that are to be provided under this
Agreement and are the services normally furnished by CMP Gas are as follows:
<PAGE>
EXHIBIT B
DETERMINATION OF COST OF SERVICE AND ALLOCATION THEREOF
CMP shall bill CMP Gas for costs incurred on behalf of performing
services as described in the attached "Description of Billing Costs and
Procedures."
Where services performed by CMP benefit other entities, CMP shall
equitably allocate the costs of such services among the entities benefiting from
such services.
CMP shall maintain records adequate to support the costs to be charged
to CMP Gas. These records shall be made available to the other for audit as
requested.
DESCRIPTION OF BILLING COSTS AND PROCEDURES
For certain types of billing activity such as requests for the construction or
repair of customer owned property, the billable charges will be reported by
indicating on the appropriate source documents (work reports, vouchers, etc.)
the Management Project Number and an approved work order number or service
request job number. The charges will be accumulated in the Unbilled Jobbing
Account and billed as specified in the agreement (i.e., monthly, quarterly or
when the job is completed). The General Accounting Section of the Accounting
Department will review the Unbilled Jobbing Account detail, and prepare and mail
the Sundry Billing invoice to the customer as specified.
The Unbilled Jobbing Account detail can be separated into six major categories;
personnel, vehicle and equipment, inventory materials, special materials,
expenses, and other costs not previously identified. Each of the foregoing
categories is described below:
A. Personnel
Payroll cost of service and allocation thereof is determined as
follows:
Personnel - The salary and wage cost of the Company's personnel,
excluding Management Committee Members, shall be charged in
conformance with the Company's standard accounting practice. The times
such personnel are engaged directly in the performance of services for
the billable activity shall be multiplied by the individual's current
charge factor. The charge factor is composed of direct labor costs,
direct payroll overheads, administrative, and general expense
overhead.
Salary and wage costs are charged directly by Company personnel to the
specific work activity performed by employees at each employee's
current rate of pay. In other words, if an employee of the Company,
who is paid at rate of $10 per hour, works five hours on a billable
working activity, the Company bills the customer $50 for the services
provided.
In addition to the employee's current rate of pay, the Company
includes overheads for two separate categories of expenses;
administrative and general expense overhead and direct payroll
overheads. The total personnel costs are charged to the customer in
accordance with the following formula:
Personnel Costs = (H x R) + ((H x R)(OHp + A&G))
where: H = hours actually worked
R = employee's actual rate of pay
OHp = A
B-C
where: OHp = payroll overhead rate
A = estimated annual payroll overhead expense
B = estimated annual base payroll
C = estimated annual base payroll
not receiving payroll overheads
A&G = D&E
F
Where: A&G = administrative and general expense rate
D = administrative and general expense
E = general office allocation
F = actual base payroll
Administrative and general expenses (D) include indirect
administrative and general expenses and costs incurred by the Company
not otherwise charged to specific work projects, such as human
resources, administrative, and legal. The general office allocation
(E) includes costs related to general plant (e.g., expenses associated
with the Company's General Office in Augusta, Maine). The current A&G
rate is ____________%.
Payroll overheads for the Company include all costs related to employee
benefits such as payroll taxes, medical, life insurance, pension, lost
time, and other similar costs. The amounts used in the payroll overhead
formula are estimated at the beginning of each year. The estimates are
revised during the course of the calendar year as actual data becomes
available. Base payroll not receiving overheads (C) includes cost
categories such as vacation and personal leave.
B. Vehicles and Equipment
The Company charges direct vehicle and equipment costs to customers as
follows:
Vehicle and Equipment - Vehicle and equipment usage
shall be charged, at the cost thereof by vehicle class, for the miles
or time devoted to performance of services to customers, in accordance
with the Company's standard accounting practice.
There are two types of vehicle and equipment costs charged to customers
by the Company: use of Company fleet vehicles and equipment (such as
trailers) by Company employees on billable work activities and use of
personal vehicles by Company employees on billable work activities.
Company employees are currently reimbursed at the rate of 30 cents per
mile.
The Company calculates fleet vehicle and equipment charges in
accordance with the following formula:
V&E costs = H x Rv
where: H = actual hours of vehicle and equipment
Rv = A/C
B
where: Rv = vehicle and equipment rate
A = the estimated expenses incurred by each
vehicle and equipment class for a 12-month
period
B = number of vehicles and equipment in each
class
C = hours used by each vehicle and equipment
in each class
As the preceding formula indicates, the Company aggregates all direct
costs related to fleet vehicles and equipment by vehicle classification
and then divides these costs by the number of vehicles or pieces of
equipment in that class. That amount is then divided by the number of
hours the Company estimates the vehicles or equipment will be used
during a given year.
C. Materials
Expenses for material, equipment, tools, or other items withdrawn from
the Company's materials and supplies inventory are charged as follows:
Materials - Materials, equipment, tools, or other items withdrawn from
the Company's materials and supplies inventory will be charged at the
average commodity inventory price, plus the Company's stores handling
charge computed in accordance with standard accounting practice. The
stores handling charges will not apply to items purchased from vendors
for use directly by or on behalf of the customer.
The Company calculates materials and supplies inventory withdrawal
charged to customers in accordance with the following formula:
Materials = (U x P) + (U x P x S)
where: U = units actually issued
P = actual average unit price
S = stores handling rate used by
location
The stores handling charge consists of costs of warehousing, lobby
stores(i.e., low cost items used in conjunction with materials and
supplies) and administrative support. Lobby stock may also be withdrawn
directly for work on a billable work activities or added to special
materials purchased specifically for use in performing services for
customers.
D. Special Materials
In the case where the Company purchases special materials for
customers, the allocation is as follows:
Generally, special materials can be purchased under special conditions
using a Company Purchase Order. Special materials shall include any
materials, supplies, tools, equipment, and other items purchased,
rented, or leased directly from vendors specifically for use in
performing services for customers. Special materials shall be billed at
invoice costs, including taxes and including all cost of
transportation, loading, unloading, storage, operation, maintenance,
and repair. A cost-based stores handling charge may be added to charges
for special materials temporarily stored or under the care of the
Company.
E. Expenses
Items ordinarily included in this category include air fare, taxi
expenses, stationery and office supplies, lodging, meals, books and
periodicals, and software. The Company charge amounts in this category
at actual cost. Charges for travel, meals, or other personnel expenses
are as follows:
Expenses - Travel, meals, or other personnel expenses incurred in
connection with services provided by the Company's employees,
including, but not limited to meals, lodging, and other subsistence
and travel expenses, as well as telephone charges, special purpose
tools and supplies, reproduction and similar items, shall be charged
in accordance with the Company's customary practice.
F. Other
Other expenses not previously identified are charged under this
category as follows:
Other - Other costs incurred in providing services hereunder to
customers shall be billed at cost.
Items that may be charged by the Company under the category "Other"
included direct costs associates with audit services provided by an
independent auditor, legal services provided by a private law firm,
contracted tree trimming by a private firm, aerial line survey
expenses, sub-contractor services and insurance expenses.
<PAGE>
Exhibit D
SUPPORT SERVICES AGREEMENT
BETWEEN
NEW YORK STATE ELECTRIC & GAS CORPORATION
AND
CMP GAS COMPANY, L.L.C.
<PAGE>
INDEX
PAGE
ARTICLE I - General Scope of Services....................................1
ARTICLE II - Payment for Services.........................................1
ARTICLE III - Term of Contract.............................................3
ARTICLE IV - Changes......................................................3
ARTICLE V - Assignment...................................................3
ARTICLE VI - Force Majeure................................................3
ARTICLE VII - Insurance and Indemnification................................4
ARTICLE VIII - General Limitations of Liability and Waiver..................5
ARTICLE IX - Notice.......................................................6
ARTICLE X - Applicable Law...............................................6
EXHIBIT A
Description of New York State Electric & Gas Corporation Support Services...8
EXHIBIT B
Determination of Cost of Service and Allocation Thereof.....................9
<PAGE>
SUPPORT SERVICES AGREEMENT
This Agreement is made as of __________, 199__, by and between New York
State Electric & Gas Corporation, a New York corporation with its principal
place of business in Ithaca, New York ("NYSEG"), and CMP Gas Company, L.L.C., a
Maine Limited Liability Company with its principal place of business in Augusta,
Maine ("CMP Gas").
WHEREAS, NYSEG is willing to provide support services to CMP Gas; and
WHEREAS, CMP Gas requires support services and desires to use and
purchase such services from NYSEG; and
WHEREAS, CMP Gas is willing to provide support services to NYSEG.
NOW, THEREFORE, it is hereby agreed as follows:
ARTICLE I - GENERAL SCOPE OF SERVICES
1. NYSEG shall provide, as needed, support services to CMP Gas,
enumerated in Exhibit A, attached hereto and made a part hereof, subject to the
applicable provisions of this Agreement; provided, however, that NYSEG and CMP
Gas shall not be responsible for policy or management decisions of the other,
such functions being reserved exclusively for each party to this Agreement,
respectively.
2. NYSEG shall provide support services using personnel from within
its own organization. In addition, NYSEG may use persons from outside its
organization with the other party's approval, such approval not to be
unreasonably withheld.
ARTICLE II - PAYMENT FOR SERVICES
1. All of the support services rendered under this Agreement shall be
charged to the other at actual cost. Support services that benefit both NYSEG
and CMP Gas shall be fairly and equitably allocated between the parties. The
methods of determining the costs and the allocation thereof are set forth in
Exhibit B, attached hereto and made a part hereof; provided that these methods
may be modified or changed by either party with the prior written approval of
the other party. If either party objects, in writing, to the proposed changes or
modifications, the parties agree to make a good faith effort to re-negotiate the
terms and conditions of Exhibit B. If no agreement can be reached within sixty
(60) days of the proposal to modify Exhibit B, the proposed modifications will
not take effect and either party may terminate this Agreement as provided
herein.
2. NYSEG shall submit itemized invoices for services rendered,
including, when requested or required by CMP Gas, all sales, use, excise, or
similar taxes that may be applicable to such services, as soon as practicable
after the close of each month. All invoices submitted by NYSEG shall have
adequate documentation to justify all labor and material costs. CMP Gas shall
pay such invoice within thirty days after receipt, to the extent the costs are
not disputed. Such disputes must be raised within eighteen (18) months after
receipt of the invoice with the disputed cost. Simple annual interest at the
prime rate then in effect at The First National Bank of Boston, plus 1.5%, shall
accrue on any undisputed invoice items not paid within thirty days after receipt
by the other, interest computed from the 31st day following the date of receipt.
3. Upon the written request of CMP Gas, NYSEG shall permit CMP Gas
reasonable access to its books and records for the purpose of auditing charges
billed by NYSEG.
ARTICLE III - TERM OF CONTRACT
This Agreement shall commence on the date first written above and
continue until terminated by either party by at least two (2) months prior
written notice to the other.
ARTICLE IV - CHANGES
No waiver, alteration, amendment, consent, or modification of any of
the provisions of this Agreement shall be binding unless in writing and signed
by a duly authorized representative of both parties.
ARTICLE V - ASSIGNMENT
Neither NYSEG nor CMP Gas may assign any of its rights or obligations
hereunder, except with the prior written consent of the other.
ARTICLE VI - FORCE MAJEURE
Force Majeure means an event that is beyond the reasonable control
of, and without the fault or negligence of, the party claiming Force Majeure,
which delays, hinders, or prevents performance of that party's obligations under
this Agreement. NYSEG or CMP Gas shall not be liable to the other for loss or
damage resulting from (1) any delay in performance, in whole or in part, or (2)
nonperformance of its contractual obligations, in whole or in part, insofar as
such delay or nonperformance is caused by Force Majeure, provided that the party
invoking Force Majeure provides written notice to the other party of the
circumstances giving rise to such delay or nonperformance within a reasonable
time after learning of such circumstances and, to the extent possible, takes
reasonable steps to correct or alleviate the circumstances that led to the Force
Majeure event.
ARTICLE VII - INSURANCE AND INDEMNIFICATION
1. NYSEG may, with respect to the services performed under this
Agreement, self-insure or obtain insurance coverage with respect to its
facilities and shall maintain the following coverage, naming the other party to
this Agreement as an additional insured, as applicable:
a) Workers' Compensation Insurance that complies with
the provisions of applicable law.
b) Employer's Liability Insurance with limits not less
than $100,000 each occurrence;
c) General Liability Insurance with limits not less than
$1,000,000 combined bodily injury and property damage
liability; and
d) Automobile Liability Insurance with limits not less
than $1,000,000 combined bodily injury and property
damage.
2. Each party shall defend (at the other's option), indemnify, and
hold harmless the other, its directors, officers, employees, contractors,
agents, successors, and assigns from and against, any actions, penalties,
claims, costs (including, but not limited to, reasonable attorney's fees), or
damages of any nature arising out of or related to the services performed
pursuant to this Agreement and shall defend the other from such claims.
ARTICLE VIII - GENERAL LIMITATIONS OF LIABILITY AND WAIVER
1. NYSEG shall provide well-qualified and experienced staff to
perform services covered by this Agreement. Names and backgrounds of said
personnel shall be provided to CMP Gas on request.
2. Services provided by NYSEG hereunder shall be performed in a
prudent, professional, and workmanlike manner. If any such services provided by
NYSEG fail to conform to this standard, CMP Gas shall, at its option, have the
right to correct or re-perform such services.
3. Except for the obligation in (2) above to correct or re-perform
services, NYSEG shall not be liable for any reason to the other for claims for
direct, incidental, indirect, consequential, or other damages of any nature
connected with or resulting from the performance or non-performance of this
Agreement by NYSEG or CMP Gas, whether or not due to negligence by NYSEG or CMP
Gas.
4. Except for the obligation imposed upon it for the payment of
support services pursuant to Article III, neither party shall be liable to the
other for claims for direct, incidental, indirect, consequential, or other
damages of any nature connected with or resulting from performance or
non-performance of this Agreement by NYSEG or CMP Gas, whether or not due to
negligence by NYSEG or CMP Gas.
5. EXCEPT AS MAY BE PROVIDED IN PARAGRAPHS 1 AND 2 OF THIS ARTICLE,
NO WARRANTIES OF ANY KIND WHETHER STATUTORY, WRITTEN, ORAL OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, SHALL APPLY TO SERVICES PERFORMED HEREUNDER.
ARTICLE IX - NOTICE
1. All communications and notices by CMP Gas to NYSEG under this
Agreement shall be sent to and addressed as follows:
New York State Electric & Gas Corporation
4500 Vestal Parkway East
Binghamton, New York 13902-3607
Attn: Michael Eastman
<PAGE>
2. All communications and notices by NYSEG to CMP Gas under this
Agreement shall be sent to and addressed as follows:
CMP Gas Company, L.L.C.
4500 Vestal Parkway East
Binghamton, NY 13902-3607
Attn: Tim Kelley
3. Either party may change the address set forth by written notice to
the other.
ARTICLE X - APPLICABLE LAW
1. This Agreement shall be governed by and construed in accordance
with the laws of the State of Maine.
2. This Agreement shall be subject to approval by any regulatory body
whose approval is a legal prerequisite to its execution, delivery, or
performance.
3. This Agreement constitutes the entire Agreement between the
parties for the services to be provided hereunder, and supersedes all prior
representations and Agreements, whether written or oral, between the parties as
to such services.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their duly authorized representatives, to become
effective as of the date first written above.
NEW YORK STATE ELECTRIC &
GAS CORPORATION
By:
Its:
<PAGE>
CMP GAS COMPANY, L.L.C.
By:
Its:
EXHIBIT A
GENERAL DESCRIPTION OF NEW YORK STATE ELECTRIC & GAS
CORPORATION SUPPORT SERVICES
The services available under this Agreement that are to be provided under this
Agreement and are the services normally furnished by CMP Gas are as follows:
<PAGE>
EXHIBIT B
DETERMINATION OF COST OF SERVICE AND ALLOCATION THEREOF
NYSEG shall bill CMP Gas for costs incurred on behalf of performing
services as described in the attached "Description of Billing Costs and
Procedures."
Where services performed by NYSEG benefit other entities, NYSEG shall
equitably allocate the costs of such services among the entities benefiting from
such services.
NYSEG shall maintain records adequate to support the costs to be
charged to CMP Gas. These records shall be made available to the other for audit
as requested.
DESCRIPTION OF BILLING COSTS AND PROCEDURES
For certain types of billing activity such as requests for the construction or
repair of customer owned property, the billable charges will be reported by
indicating on the appropriate source documents (work reports, vouchers, etc.)
the Management Project Number and an approved work order number or service
request job number. The charges will be accumulated in the Unbilled Jobbing
Account and billed as specified in the agreement (i.e., monthly, quarterly or
when the job is completed). The General Accounting Section of the Accounting
Department will review the Unbilled Jobbing Account detail, and prepare and mail
the Sundry Billing invoice to the customer as specified.
The Unbilled Jobbing Account detail can be separated into six major categories;
personnel, vehicle and equipment, inventory materials, special materials,
expenses, and other costs not previously identified. Each of the foregoing
categories is described below:
A. Personnel
Payroll cost of service and allocation thereof is determined as
follows:
Personnel - The salary and wage cost of the Company's
personnel, excluding Management Committee Members, shall be charged in
conformance with the Company's standard accounting practice. The times
such personnel are engaged directly in the performance of services for
the billable activity shall be multiplied by the individual's current
charge factor. The charge factor is composed of direct labor costs,
direct payroll overheads, administrative, and general expense overhead.
Salary and wage costs are charged directly by Company personnel to the
specific work activity performed by employees at each employee's
current rate of pay. In other words, if an employee of the Company, who
is paid at rate of $10 per hour, works five hours on a billable working
activity, the Company bills the customer $50 for the services provided.
In addition to the employee's current rate of pay, the Company includes
overheads for two separate categories of expenses; administrative and
general expense overhead and direct payroll overheads. The total
personnel costs are charged to the customer in accordance with the
following formula:
Personnel Costs = (H x R) + ((H x R)(OHp + A&G))
where: H = hours actually worked
R = employee's actual rate of pay
OHp = A
B-C
where: OHp = payroll overhead rate
A = estimated annual payroll
overhead expense
B = estimated annual base payroll
C = estimated annual base payroll
not receiving payroll overheads
A&G = D&E
F
Where: A&G = administrative and general
expense rate
D = administrative and general
expense
E = general office allocation
F = actual base payroll
Administrative and general expenses (D) include indirect administrative
and general expenses and costs incurred by the Company not otherwise
charged to specific work projects, such as human resources,
administrative, and legal. The general office allocation (E) includes
costs related to general plant (e.g., expenses associated with the
Company's General Office in Augusta, Maine). The current A&G rate is
____________%.
Payroll overheads for the Company include all costs related to employee
benefits such as payroll taxes, medical, life insurance, pension, lost
time, and other similar costs. The amounts used in the payroll overhead
formula are estimated at the beginning of each year. The estimates are
revised during the course of the calendar year as actual data becomes
available. Base payroll not receiving overheads (C) includes cost
categories such as vacation and personal leave.
B. Vehicles and Equipment
The Company charges direct vehicle and equipment costs to customers as
follows:
Vehicle and Equipment - Vehicle and equipment usage shall be charged,
at the cost thereof by vehicle class, for the miles or time devoted to
performance of services to customers, in accordance with the Company's
standard accounting practice.
There are two types of vehicle and equipment costs charged to customers
by the Company: use of Company fleet vehicles and equipment (such as
trailers) by Company employees on billable work activities and use of
personal vehicles by Company employees on billable work activities.
Company employees are currently reimbursed at the rate of 30 cents per
mile.
The Company calculates fleet vehicle and equipment charges in
accordance with the following formula:
V&E costs = H x Rv
where: H = actual hours of vehicle and
equipment
Rv = A/C
B
where: Rv = vehicle and equipment rate
A = the estimated expenses incurred by
each vehicle and equipment class
for a 12-month period
B = number of vehicles and equipment
in each class
C = hours used by each vehicle and
equipment in each class
As the preceding formula indicates, the Company aggregates all direct
costs related to fleet vehicles and equipment by vehicle classification
and then divides these costs by the number of vehicles or pieces of
equipment in that class. That amount is then divided by the number of
hours the Company estimates the vehicles or equipment will be used
during a given year.
C. Materials
Expenses for material, equipment, tools, or other items withdrawn from
the Company's materials and supplies inventory are charged as follows:
Materials - Materials, equipment, tools, or other items withdrawn from
the Company's materials and supplies inventory will be charged at the
average commodity inventory price, plus the Company's stores handling
charge computed in accordance with standard accounting practice. The
stores handling charges will not apply to items purchased from vendors
for use directly by or on behalf of the customer. The Company
calculates materials and supplies inventory withdrawal charged to
customers in accordance with the following formula:
Materials = (U x P) + (U x P x S)
where: U = units actually issued
P = actual average unit price
S = stores handling rate used by
location
The stores handling charge consists of costs of warehousing, lobby
stores(i.e., low cost items used in conjunction with materials and
supplies) and administrative support. Lobby stock may also be withdrawn
directly for work on a billable work activities or added to special
materials purchased specifically for use in performing services for
customers.
D. Special Materials
In the case where the Company purchases special materials for
customers, the allocation is as follows:
Generally, special materials can be purchased under special conditions
using a Company Purchase Order. Special materials shall include any
materials, supplies, tools, equipment, and other items purchased,
rented, or leased directly from vendors specifically for use in
performing services for customers. Special materials shall be billed at
invoice costs, including taxes and including all cost of
transportation, loading, unloading, storage, operation, maintenance,
and repair. A cost-based stores handling charge may be added to charges
for special materials temporarily stored or under the care of the
Company.
E. Expenses
Items ordinarily included in this category include air fare, taxi
expenses, stationery and office supplies, lodging, meals, books and
periodicals, and software. The Company charge amounts in this category
at actual cost. Charges for travel, meals, or other personnel expenses
are as follows: Expenses - Travel, meals, or other personnel expenses
incurred in connection with services provided by the Company's
employees, including, but not limited to meals, lodging, and other
subsistence and travel expenses, as well as telephone charges, special
purpose tools and supplies, reproduction and similar items, shall be
charged in accordance with the Company's customary practice.
F. Other
Other expenses not previously identified are charged under this
category as follows:
Other - Other costs incurred in providing services hereunder to
customers shall be billed at cost.
Items that may be charged by the Company under the category "Other"
included direct costs associates with audit services provided by an
independent auditor, legal services provided by a private law firm,
contracted tree trimming by a private firm, aerial line survey
expenses, sub-contractor services and insurance expenses.
FIRST AMENDMENT TO JOINT VENTURE AGREEMENT
THIS FIRST AMENDMENT TO JOINT VENTURE AGREEMENT ("the First Amendment")
is made the 7th day of May 1998, by and between New York State Electric & gas
Corporation, ("NYSEG"), a New York State Corporation, having offices at 4500
Vestal Parkway East, Binghamton, New York and Central Maine Power Company
("CMP"), having offices for the transaction of business at 83 Edison Drive,
Augusta, ME 04336.
WITNESSETH
WHEREAS, NYSEG and CMP have previously entered into a Joint Venture
Agreement dated November 13, 1997 (the "Agreement") under which CMP and NYSEG
have agreed to jointly engage in the business of owning, constructing and
operating a local natural gas distribution company to provide natural gas
distribution and related services to customers in Maine and to customers in the
proximity of Portland Natural Gas Transmission System ("PNGTS") and/or Maritimes
and Northeast Pipeline, L.L.C. ("Maritimes") in New Hampshire and to engage in
such other businesses as may be subsequently agreed to by the Management
Committee of the Maine Limited Liability Company ("L.L.C.") that the parties
will constitute and establish; and
WHEREAS, CMP and NYSEG desire to amend and modify the Agreement to
provide for six (6) in lieu of four (4) Management Committee members.
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, the sufficiency of which each party acknowledges, NYSEG and CMP
desire and agree to amend the Agreement between the parties as follows:
1. Article 1.1 (s) of the Agreement shall be deleted in its
entirety and shall be replaced by the following:
(s) "Management Committee" means a six (6) person body, three
(3) of whom shall be appointed by NYSEG or its parent Energy
East Corporation and three (3) of whom shall be appointed by
CMP. The Chairmanship of the Management Committee shall be for
a one year term. The Chairmanship shall alternate year to year
between a designee of CMP and NYSEG. CMP and NYSEG shall each
be entitled to designate two (2) alternate members of the
Management Committee, a primary and a secondary alternate.
Alternate members of the Management Committee may serve as
alternates for any Management Committee member. Alternates
shall serve in the absence of the designated member(s) of the
Management Committee. The Management Committee members shall
have the right to remove their designated alternates and to
designate their replacements, in each case by written notice
to the other party.
2. In Section 5.3 of the Agreement, the word "four", which is the
last word on the twelfth line of that section, shall be
deleted and replaced with the word "six".
3. In all other respects and as to all of its other terms and
conditions, the Joint Venture Agreement dated November 17,
1997 between the parties shall remain unchanged and shall
remain in full force and effect.
4. The Effective Date of this First Amendment shall be the date
first set forth above.
5. The parties agree that a facsimile signature will serve as an
original and that the Statute of Frauds shall be waived as to
any claim associated with the acceptance of a facsimile
signature. This First Amendment may be signed in counterpart
but shall not be effective until such time as both parties
have separately signed this First Amendment.
IN WITNESS WHEREOF, the parties have executed this First Amendment on
the date first written above.
CENTRAL MAINE POWER NEW YORK STATE ELECTRIC
COMPANY & GAS CORPORATION
By: David Flanagan By: Wesley W. von Schack
David Flanagan Wesley W. von Schack
President & CEO Chairman, President and
Chief Executive Officer
EXHIBIT D-1
EXHIBIT D-1
REDACTED VERSION
(Confidential information is indicated by blank spaces on pages
17, 19, 28, 33 and 36)
STATE OF MAINE Docket No. 96-786
PUBLIC UTILITIES COMMISSION August 17, 1998 CENTRAL MAINE POWER COMPANY ORDER
Petition for Approval to Furnish Gas Service In and To Areas Not Currently
Receiving Natural Gas
WELCH, Chairman; NUGENT, Commissioner
- -----------------------------------------------------------------
TABLE OF CONTENTS
I. SUMMARY OF DECISION..........................................4
II. PROCEDURAL HISTORY..........................................4
III. INTRODUCTION:COMMISSION POLICY REGARDING THE DEVELOPMENT
OF GAS DISTRIBUTION SYSTEMS IN MAINE ...........................4
A. Overview.....................................................4
IV. STANDARD OF REVIEW..........................................7
A. Statutory Framework..........................................7
B. Mid-Maine....................................................8
1. Service Authority Tests......................................8
2. Public Convenience and Necessity............................10
3. Regulatory vs. Market Role..................................10
4. Policy Confirmation.........................................13
V. OVERVIEW OF CMP/NYSEG'S PROPOSAL............................14
VI. ANALYSIS OF PROPOSAL.......................................16
A. Engineering Plans & Safety..................................16
1. Design and Construction Expertise...........................16
2. Construction Schedule.......................................16
B. Resource Plan...............................................17
C. Financing Plan..............................................18
D. Ability to Provide Service at Just and Reasonable Rates.....18
1. Cost of Service and Rate of Return Studies..................18
a. Economies of Scale..........................................19
b. Marketing Assessment........................................20
c. Revenue Projections.........................................21
d. Rate of Return and Financial Viability......................21
2. Rate Plan...................................................22
a. Terms and Conditions of Service.............................22
b. Confidential Treatment of CMP's Rate Proposal...............22
c. Customer Charges............................................23
d. Composition of Base Rates...................................24
e. Late Collection Fee.........................................24
f. Gas Costs...................................................25
g. FPO and IPO Gas Pricing Options.............................25
3. Corporate Organization......................................26
4. Conclusion..................................................28
VII. ANALYSIS OF NEED and PUBLIC NECESSITY.....................28
A. Need........................................................29
B. Public Convenience and Necessity............................29
1. Current Authority in Unserved Areas.........................29
2. The Bath/Brunswick Coastal Area.............................30
a. Cost........................................................31
Order - 2 - Docket No. 96-786
b. Failure to Serve............................................32
c. Commitment To Expand........................................33
d. Economies of Scale..........................................34
e. Timing......................................................34
f. Rate Comparisons............................................35
g. Bath/Brunswick Area Conclusion..............................35
3. The Bangor Area.............................................36
4. The Augusta, Bethel, Waterville,and Windham Areas...........37
C. Suspension of Service Territory Authority...................37
D. Reporting Requirement for All Authorized LDCs...............39
VIII. NECESSARY TERMS OF REVISED PROPOSAL......................39
XI. CONCLUSION.................................................40
Appendix A: Procedural History.................................41
I. SUMMARY OF DECISION
We grant Central Maine Power Company (CMP)1 unconditional authority to
serve in the areas it has proposed in its Phase II filing, subject to the
submission and approval of a revised proposal as outlined in this Order. In so
doing, we endorse the Mid-Maine policy of allowing competition for customers
among local distribution companies in Maine unless there is evidence of harm to
the public interest.
II. PROCEDURAL HISTORY
The Procedural History is contained in Appendix A to this Report.
III. INTRODUCTION: COMMISSION POLICY REGARDING THE DEVELOPMENT OF GAS
DISTRIBUTION SYSTEMS IN MAINE
A. Overview
Over the last few years there have been dramatic changes in the
prospects for increased availability of natural gas to the State of Maine.
Whereas Maine has been at the end of the national natural gas transmission
system with one established local distribution company (LDC), it now enjoys the
prospect of two new international pipelines' bringing new gas supplies through,
and to, much of Maine's developed area. This has created a vibrant interest in
the expansion of natural gas infrastructure and service in Maine, resulting in
numerous applications for service authority for various regions of the state by
would-be local distribution companies.
Our task, starting with Mid-Maine Gas Utilities, Inc.'s (MMGU's)
application for preliminary service authority to serve in the Bangor area in
1996, has been to identify and establish the best public policy for allocating
service authority consistent with our statutory obligations. See Mid-Maine Gas
Utilities Inc., Request for Approval to Furnish Gas Service, Docket No. 96-465,
(granting Mid Maine preliminary or conditional (2104) approval to serve in the
municipalities of Bangor, Brewer, Old Town, Orono, and Veazie)(Mid-Maine), Order
(March 7, 1997). Our goals include encouraging and promoting the development of
gas infrastructure and assisting in bringing an additional,
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1
CMP filed this application on behalf of its proposed joint venture with New York
State Gas and Electric (NYSEG) to form a gas utility to provide service within
Maine.
In this report we will refer to the applicants as CMP Natural Gas (CMP NG), the
proposed name for the joint venture.
- ------
beneficial fuel source to the broadest array of customers that is economically
supportable.
In Mid-Maine, the Commission stated that it would consider granting
multiple service authority applications in discrete areas of the State if all
project proposals were sound. The expectation was that market forces would --
and could better -- determine which of the certificated entities would actually
serve in a given area. Because of the strong market presence of oil and
electricity as well-established fuel alternatives in Maine, natural gas is
subject to substantial competitive price pressure from these alternatives.
After much evidence and debate throughout this and similar proceedings
(e.g., Bangor Gas Company L.L.C., Petition for Approval to Provide Gas Service
in the Greater Bangor Area, Docket No. 97-795 Order (June 30, 1998) (Bangor
Gas)), we continue to be persuaded that local natural gas distribution service
is best selected for entry to an area by the market and societal forces that
come into play in the organization and start-up of an LDC. While local
distribution service has some of the hallmark characteristics of a natural
monopoly -- for example, installation of natural gas infrastructure is capital
intensive and one distribution system investment in an area is generally less
costly than more than one -- we believe the potential benefits of competition
outweigh the potential harms. The economic facts are that it may not be possible
in many areas to obtain sufficient load, due to the typically low population
density in Maine, to support two utilities and that the total cost of service
will likely be higher where two utilities exist. We expect the competing
utilities will take these factors into account, with the result that uneconomic
duplication of infrastructure and detrimental "races to the trench" are not
likely given the economic incentives of the entities.
From this we conclude that, as a general matter, authorizing more than
one LDC to serve an area will result in beneficial competition to obtain
adequate customer load to build and serve an area in a manner that may very
likely "grow the market" so that system expansion may ultimately be greater than
it would be if only a single entity was authorized to serve. Nor do we expect
that market inefficiencies, such as uneconomic duplication of facilities and
lost economies of scale, will predominate or necessarily result in higher prices
to end-users. We expect that the efficiencies and product diversification that
are the hallmarks of competition will result in system expansion that is at
least as socially beneficial as that which could be achieved by traditional
means as a regulated monopoly service.
Moreover, we do not believe that, if customers are the selecting
mechanism, benefits would accrue to only the largest customers to the detriment
of smaller customers. Beneficial deals and discounts to large customers may make
it more imperative for the entity to obtain additional small customers in order
to increase throughput and achieve an adequate return on infrastructure
development. Consequently, competition among providers could ultimately drive
deeper discounts to all customers as well as deeper penetration levels within a
given area.
We do not expect a policy allowing competition among LDCs to unduly
burden municipal officials. The evidence in this case suggests that entities
will not seek to construct overlapping facilities, nor is it likely that they
will begin construction without assuring that they have secured an adequate
number of customers to recover their costs. Utilities may also be able to
negotiate mutually beneficial arrangements of joint use of facilities like that
accomplished by Maritimes & Northeast Pipeline and Portland Natural Gas
Transmission Service (PNGTS). See Portland Natural Gas Transmission System and
Maritimes & Northeast Pipeline, L.L.C., FERC Docket No. CP97-238-000 (Joint
Facilities).
Should problems arise, we urge municipal officials to bring the matter
directly to us for resolution. However, we will expect parties to bring only
evidence of an actual problems, not simply concerns that a problem may arise in
the future.
Consequently, we conclude that economic efficiencies and the public
interest in safe and adequate service and facilities and orderly infrastructure
development will be amply served by allowing multiple gas utilities to compete
to serve an area. The policy explored in Mid-Maine has inspired lively
competition for service authority franchises before this regulatory agency,
demonstrating significant value in opening the door to competition for this
service. The policy has encouraged aggressive and innovative proposals for
development of service to previously unserved areas. We see no benefit in
cutting off competition at this point and foreclosing further benefits that it
may provide.
We do not preclude the possibility of limiting the number of authorized
distribution utilities to serve within a given municipality if the evidence
demonstrates that multiple utilities are not in the public interest. It is
possible that there may be circumstances where a shared service territory would
not be beneficial. However, we find no evidence before us at this time to
support not allowing two local distribution gas utilities to actively compete to
provide service to these unserved municipalities.
With this policy framework in mind, we will consider the issues raised
in this proceeding.
IV. STANDARD OF REVIEW
A. Statutory Framework
Title 35-A Section 2104 requires every gas utility to obtain commission
approval before furnishing service in or to any municipality even if no other
gas utility is furnishing or is authorized to furnish gas service therein.
Section 2102(1) requires a public utility to obtain the approval of the
Commission before it may furnish service "in or to any municipality in or to
which another public utility is furnishing or is authorized to furnish
service..."
Section 2105(1) further states: .... no approval required by 2102,
2103, or 2104 and no license, permit or franchise may be granted to any
person to operate, manage or control a public utility named in section
2101 in a municipality where there is in operation in a public utility
engaged in similar service or authorized to provide similar service,
until the commission has made a declaration, after public hearing of
all parties interested, that public convenience and necessity require a
2nd public utility.
(emphasis added.)
Both sections 2104 and 2105 require us to determine, as a public
interest matter, that the proposed service will be provided in a safe and
adequate manner at rates that are just and reasonable. See Mid-Maine at 6.
At least one utility is already authorized to serve in all areas of the
state.2 Thus, we will examine the evidence
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2
Northern's statewide service authority derives from Northern Utilities, Inc.,
Re: Petition for consent to furnish natural gas service in and to any city or
town in the State of Maine, U. #2782 (June 27, 1969). Bangor Gas, the other
entity that currently has unconditional service authority in Maine (for five
municipalities in the Bangor area), obtained authority in Bangor Gas Company,
L.L.C., Petition for Approval to Provide Gas Service in the Greater Bangor Area,
Docket No. 97-795, Order (June 30, 1998). Mid Maine Gas Utilities, Inc. also has
conditional service authority in these five Bangor area municipalities in Docket
No. 96-465.
- ------
presented in this proceeding to determine whether, in our judgment, the public
convenience and necessity require the authorization of a second utility to serve
the areas in question. This determination may turn on issues of fact and policy
as we consider each area.3 An applicant generally has the burden of proof to
show that there is a need for service in areas in which it proposes to serve and
that it is able to, in a timely manner, provide safe and adequate service at
just and reasonable rates. See 35-A M.R.S.A. sect. 1314. However, a previously
authorized utility contesting an application can present evidence to the
contrary. See 35-A M.R.S.A.
sect. 2105(2).
These standards guide our review of applications submitted pursuant to
35-A M.R.S.A. sect. 2105.
B. Mid-Maine
1. Service Authority Tests
Under the standards set out in Mid-Maine for grants of service authority,
applicants must show that 1) a need for the proposed service exists, 2) the
applicant has the technical ability to provide service, 3) the applicant has
adequate financial resources to complete the project, and 4) the applicant's
proposal will provide safe and reliable service at just and reasonable rates.
Need exists if the service is not being provided. See Mid-Maine at 10.
This applies to municipalities which a utility is authorized to serve but where
it is not currently serving customers.
The standard enunciated in Mid-Maine for review of the merits of an
applicant's proposal is that the Commission must determine that the grant of
authority will promote safe, reasonable, and adequate services at rates which
are just
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3
See Order Granting Northern's Motion for Reconsideration, May 14, 1998 at 5.
- ------
and reasonable to customers and public utilities.
Mid-Maine at 6.
Finally, the grant of service authority to a second utility pursuant to
35-A M.R.S.A. sect. 2105 must serve the public convenience and necessity.
Mid-Maine refers to the importance of ultimately considering public interest
issues when making findings in support of a certificate of authority:
A finding of need is not conclusive on the issue of whether or not an
applicant should be granted authority to provide service. The
Commission must also assess the technical and financial capability of
the applicant and address issues such as uneconomic duplication of
facilities, fairness to existing investors, and any other factor
implicated by the Commission's broad public policy standard.
Mid-Maine at 10.
In Mid-Maine we concluded that the evidence before us supported a grant
of conditional (2104) authority to Mid Maine because: 1) the applicant had
presented an identified project based on generally reasonable assumptions, 2)
the applicant had conducted a reasonable preliminary analysis, 3) the risks of
project cost and marketability would largely be borne by the applicant's (Mid
Maine's) investors, not ratepayers, and 4) alternate fuels would limit Mid
Maine's ability to recover uneconomic costs from future ratepayers. Lastly, Mid
Maine was required to file and receive approval of more detailed plans for
construction, engineering, and financing before it would be fully authorized to
serve.
As in Mid-Maine and Bangor Gas, our review of CMP NG's application depends
on evidentiary findings as to 1) whether granting the proposal will promote the
provision of safe and adequate service at rates which are just and reasonable to
customers and public utilities, and 2) whether the public convenience and
necessity require a second utility in any of the areas in which CMP NG proposes
to serve. If CMP NG's proposal is found to meet the statutory test articulated
in 1) above, then the determination becomes an area-specific determination of
public convenience and necessity based on policy and evidence.
2. Public Convenience and Necessity
In Mid-Maine we stated:
Likewise, under sect. 2015, in determining what showing an applicant must make
to demonstrate that the public convenience and necessity would be served by the
grant of a second utility certificate, the Commission must interpret that
statute to consider the overall statutory scheme..... Thus:
...The "public interest" is shown by Title 35 to encompass those facets
of the Commission's regulatory functions that are directed to ensuring
that the public receives adequate service, delivered in a safe and
reliable manner, at a charge just and reasonable in relation to the
public utility's costs of providing service. (citations omitted)
Mid-Maine at 7 (emphasis added). Regarding this public interest requirement, the
order further states:
The public interest requires careful consideration of a spectrum of
issues. In ruling on such petitions, this Commission will look to
further the public policy objectives embodied in statute. Will granting
a certificate promote the orderly and efficient development of
infrastructure? Will the grant of a certificate adversely or
beneficially affect economic development in other sectors of the
economy? Other areas of the Commission mandate may be implicated as
well, including oversight of affiliate transactions or general
supervisory authority under sect. 1302 and sect.1303.
Mid-Maine at 8.
3. Regulatory vs. Market Role
In Mid-Maine, we articulated our view of the active role that markets
would play in the provision of LDC service as follows:
Moreover, given the inter-fuel competition for the end uses Mid Maine
seeks to serve, we believe it is reasonable to assume that there is and
will be a market-imposed limit on Mid Maine's ability to recover
uneconomic costs from future ratepayers That limit will be the
comparative costs of current or potential alternatives. Still, we
acknowledged a continued role for Commission oversight. There is a risk
that some customers could make poorly informed choices or that
marketers could misrepresent the value of reliability of their product
to induce load. These concerns justify careful Commission or other
oversight of utility customer relations and trade practices. There is
currently an active market for the end uses Mid Maine seeks to provide.
We believe that the market, in conjunction with continued oversight of
utility practices under 35-A, protects consumers adequately.
Mid-Maine at 14.
Finally, the Mid-Maine order addressed parties' concerns regarding the
orderly development of infrastructure and the risk of duplication of facilities.
Some parties argued that the Commission should not authorize two utilities to
serve the same service area due to the possibility of uneconomic development or
delay in infrastructure development created by a situation in which neither
utility could secure enough load to warrant expansion. The Order found that the
risk of two mains being constructed on the same street was slight, based on
testimony in that proceeding.
Further, we stated our view that it is markets, not the Commission,
that should make the ultimate determinations of service area for LDCs.
It follows that a Commission attempt to dictate a priori "spheres of
development" would be economically misguided and largely arbitrary.
Mid-Maine at 17.
Based upon this evidence we believe that there is little risk of
large-scale duplication of facilities. We believe knowledgeable
investors will act rationally in determining which projects to pursue
and that, absent specific evidence of uneconomic duplication, the
economies of scale inherent in the industry can be relied upon to make
themselves felt without extensive Commission oversight.
There is a potential risk that permitting two or more utilities to
compete for load in the same area may delay the development of
infrastructure by making it more difficult to recruit the critical mass
of load. However, this risk must be balanced against the potential
benefits to consumers of having two or more entrepreneurs competing on
the basis of price and service quality to serve their needs. Moreover,
it is possible that the threat of competition may accelerate the
development of gas infrastructure as each party strives to foreclose
others by being the first to provide service in a given area. We do not
believe it is merely fortuitous that Mid Maine's petition should have
triggered requests by others, notably CMP, for similar authority, and
prompted less formal expressions of interest by NU in not being
foreclosed from petitioning the Commission to serve these areas in the
future. Weighing these factors, we conclude that the public interest
would best be served by encouraging competition in the provision of
this service and intervening in the operations of the market only where
there is evidence, rather than speculation, that consumers and
investors would benefit from such action. We do not at this time
foreclose the possibility that the public interest may demand such
intervention in the future. Nothing in this record, however, persuades
us that it would be beneficial at this time.
Mid-Maine at 19.
Thus, while the decision in Mid Maine relies on specific evidence and
frequent references are made to basing service authority awards on public
interest determinations and case-specific evidentiary reviews, the overarching
theme throughout the Mid-Maine order indicates a new policy direction based on
the balance between regulatory oversight and market forces. In essence, our
Order established a "presumption" that, due to market forces, Commission
involvement in local distribution company entry into unserved markets would not
be required or exercised, absent evidence to the contrary. 4. Policy
Confirmation
The July 13th Examiner's Report (ER or Report) in this docket suggested
a policy that would modify the Mid-Maine "regulatory hands off/market forces
determinative" approach by finding that LDC service is a natural monopoly --
capital intensive, displaying clear economies of scale, such that "more than one
such investment in an area can generally not be economically supported." The ER
concluded that the public interest warrants orderly and efficient development of
service and facilities, that competition between multiple LDCs would foster an
undesirable race to the trench and waste of resources, and, consequently, that
entry by a utility into a service area should be supervised by this Commission.
However, as in Mid-Maine, the articulated policy presumption does not preclude a
finding that more than one utility might be authorized to serve within a given
municipality if supported by evidence.
The policies set out in Mid-Maine and in the ER do not modify the
fundamental standards for awarding service authority: specific evidentiary
findings must be made to certify the applicant and its proposal and public
interest or policy issues must also be considered. However, the Report's policy
statements would have shifted the presumption as to whether the Commission is
likely to certify multiple LDCs in a given area. Mid-Maine states that the
Commission presumes that market forces will adequately resolve service area
issues so that, absent evidence to the contrary, multiple applications may be
approved and allowed to compete in the local area. In contrast, the Report
concluded that it generally will not be economic for more than one entity to
serve in an area, that higher costs and lower service levels will exist if
competition is allowed at the local level, and, accordingly that it is in the
public interest for the Commission to control entry to a service area based on
evidence that it will enhance, not deplete, service offerings. Either policy
allows for the presumption to be disproved with specific evidence.
We decline to adopt the policy framework and policy findings set out in
the Examiner's Report. Rather, we remain convinced that the policy established
in Mid-Maine is still valid and confirm it by our decision here. Specifically,
we do not believe that it would necessarily be the case that, in a one-utility
scenario, service will be provided to a larger area because of lower total
system costs. Under a competitive model, utilities will strive to obtain greater
load to reduce their unit costs and boost profits at the margins. Two entities
making such an effort may actually "grow the market." Next, it is not a
certainty that higher system costs will translate into higher prices to end
users. Insofar as it is in the utility's interest to maximize load on its
system, utilities may provide services at lower margins in order to obtain more
customers and reach an acceptable overall earnings level. We believe that there
is ample evidence in this proceeding to confirm that the policy stated in
Mid-Maine serves the public interest with regard to LDC development. Most
notably, this evidence includes: Northern's apparent response to competitive
pressures presented by CMP NG, the Town's support for CMP NG, and the Town's
appeal to us to keep competitive pressure alive to spur greater growth and
earlier service to their areas.
Finally, as we make clear below, the risks associated with a
distribution company's startup and uneconomic expansion in this competitive
circumstance must fall on a utility's shareholders, not ratepayers. Setting this
as a ground rule for all Maine gas utilities for future system expansion to
unserved areas places all LDCs on equal footing.
V. OVERVIEW OF CMP/NYSEG'S PROPOSAL
On February 23, 1998, CMP and NYSEG filed a request for unconditional
authorization to furnish gas service to Bethel, the Windham area, the greater
Augusta area, the greater Bangor area, and the Brunswick, Bath, and southern
coastal area. The filing reveals an ambitious plan to bring natural gas service
to these areas by 1999. Included in the filing was the testimony of 12 CMP and
NYSEG witnesses dealing with a variety of technical topics. Much of the
information contained in the filing has been designated as confidential and only
the Office of Public Advocate (OPA) and Commission Advisory Staff have had
access to all the data.
CMP NG proposed to undertake the construction activities necessary to
serve customers in Bethel, the Windham/Standish and Bath/Brunswick areas
beginning November 1, 1998, contingent on Commission approval in May of 1998. In
an attempt to hold its construction costs down, CMP NG has entered into
"alliance" contracts with contractors in which the CMP NG and its contractors
work as a team towards a common objective of overall project success. CMP NG has
attempted to use locally-based contractors to the maximum extent possible.
The CMP NG's proposed rates have been designed to compete with the
price of No. 2 and (where appropriate) No. 6 fuel oil. CMP NG would provide both
bundled and unbundled (transportation) services for its customers. Unbundled
service would initially be provided only to customers with daily metering
capability, i.e. generally large commercial and industrial customers. CMP NG
states that, if authorized to serve in Maine, it intends to propose a small
customer transportation program at some time in the future. In addition, CMP NG
has furnished a set of tariffs for the services it intends to offer.
CMP NG would offer bundled sales service customers two options, the
Indexed Price Option (IPO) and the Fixed Price Option (FPO), for their purchase
of gas commodity. Both the IPO and FPO represent a means of adjusting gas prices
to reflect New York Mercantile Exchange (NYMEX) oil and gas market conditions.
Under the IPO, a base cost of gas is adjusted monthly to reflect changes in the
oil and gas commodity markets. Each month, the spot month closing settlement
price of gas traded at the Henry Hub is averaged with a No. 2 heating oil spot
month closing settlement price.4 The resulting price is called the "Total
Settlement," and the "IPO Adjustment" is the adjustment necessary (positive or
negative) to raise or lower the base price to the settlement price.
The FPO adjustment is a longer term adjustment which works in a manner
similar to the IPO, but uses NYMEX futures contracts rather than monthly closing
spot prices in order to lock in prices for longer periods of time. Customers
choosing the FPO would be able to select gas price contracts ranging in duration
from three months up to two years. The purpose of including oil prices in with
gas prices is ostensibly to assure customers their gas prices are competitive.
CMP NG's plan obviates the need for seasonal cost of gas adjustment proceedings
because gas prices are either adjusted monthly, or are locked in by the futures
market.
CMP NG's non-gas distribution service prices 5 were multiplied by the
forecast gas throughput to develop forecast revenues. The revenue forecast was
then used along with a cost of service study to forecast earnings over a 6-year
period.
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4
After the $/gallon units have been converted to $/therm in order to make the
units equivalent.
5
CMP NG's Exhibits hold prices constant for the study period.
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VI. ANALYSIS OF PROPOSAL
A. Engineering Plans and Safety
CMP NG possessed an adequate degree of technical ability to support a
grant of conditional service authority. See Order (March 11, 1998) at 9.
In Phase II, CMP NG presented diagrams indicating the location of its
distribution mains in all project areas.
1. Design and Construction Expertise
CMP NG's engineering witnesses generally provided credible evidence of
sound planning practices, an adequate degree of technical expertise, and
expressed a clear intention to abide by federally required safety standards. CMP
NG plans on constructing its system in accordance with Title 49 of the Code of
Federal Regulations (CFR), Parts 191 and 192. In addition, CMP NG intends to
exceed those requirements by installing gas flow limiters on all residential
services and by exceeding the prescribed odorization requirements.
One point of exception to CMP NG's otherwise sufficient expertise and
planning was its lack of awareness that winter construction moratoria may exist
in most, if not all, Maine communities in which CMP NG proposes to construct its
system in time to provide service in 1998. 6 This fact means that the timing for
its proposed plans to serve in 1998, if construction during the winter months is
required, would likely not be feasible. However, this oversight by itself does
not cause us to lack confidence in the overall capability and expertise of the
CMP NG engineering and construction team.
The CMP NG plans generally exhibit a level of engineering and
construction competence similar to that demonstrated by Bangor Gas. The
engineering and construction proposal overall appears reasonable in terms of
safety and expertise.
2. Construction Schedule
CMP NG's initial construction schedule indicated that the Bath/Brunswick
area steel mains to anchor customers would be installed in time to provide gas
service in 1998. In
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6
We find this omission puzzling given that we also heard testimony from the Towns
praising CMP NG for its active involvement with the municipalities regarding its
proposal.
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addition, portions of the Bethel and Windham stations were also expected to be
in service for the 1998-1999 heating season. This original schedule is not
feasible at this time. It will take approximately five months, once it receives
all necessary approvals, for CMP NG to have an operable "take station" on the
gas transmission facilities. This facility is necessary to provide the gas
supply for service to the Bath/Brunswick area.
In addition, many of the towns under consideration prohibit public
street openings after the hot asphalt plants close in early winter, making
late-season construction less likely. Based on the record, we find it is
unlikely that CMP NG will be able to deliver gas to the communities in 1998 as
initially proposed. CMP NG should provide a revised construction schedule with
any modified proposal filed for review.
B. Resource Plan
While we rely primarily on competition from other fuels to ensure that
prices paid by customers for gas service remain "just and reasonable," we are
nevertheless concerned that, in its filing, CMP's gas supply cost estimates may
be unrealistic. See Section VI.D.2.f. below. Where ratepayers may be at risk for
gas costs, we require a more complete demonstration of the basis for gas cost
projections than has been provided by CMP NG here, including information on how
it would obtain supplemental supplies and how this would affect overall gas
costs.
Because, as indicated below, we will require that CMP NG's investors
bear the risks of project failure, we are less concerned than we would be in a
more conventional regulated monopoly setting about the accuracy of CMP NG's
projected gas costs. Instead, we will focus on whether CMP NG's proposed
resource plan is realistic and that it will have gas supplies adequate to
provide the services that it proposes. See Bangor Gas, Order Granting
Unconditional Authority Service at 12-14. CMP NG has demonstrated that it has
begun discussions with the gas marketing community. In addition, it has
discussed with
At the May technical conference, CMP NG had not determined the cost or
confirmed the viability of this resource supply arrangement. We require CMP NG
to file further evidence of its available supplies for its winter heating loads
so we can be assured that it will have adequate and reliable gas supplies for
the service it plans to provide.
C. Financing Plan
In our March 11, 1998 Order in this docket (Phase I), we granted CMP NG
conditional authority to serve as a public gas utility in 66 municipalities in
Maine. The grant of authority was based on a finding that the joint venture
between CMP, Maine's largest electric utility serving more than 521,000
customers in an 11,000-square-mile area, and NYSEG, New York State's third
largest investor-owned utility, had adequate financial capability to develop a
natural gas utility. In 1997, NYSEG served 241,000 gas customers and 811,000
electric customers and had operating revenues exceeding $2 billion and total
capitalization of $3.2 billion. Both entities have had ample experience
operating as public utilities in their respective jurisdictions.
CMP and NYSEG plan to initially capitalize this joint venture with $20
million equity contributions ($10 million each). The proposed capital structure
will be 50% equity and 50% debt. We have already approved the "CMP" portion of
this investment.7 See Central Maine Power Company, Application for Approval of
Reorganizations, of Transactions with Affiliated Interests, and Transfer of
Assets, Docket No. 97-930, (June 30, 1998) and Central Maine Power Company,
Application for Approval of Reorganizations, Affiliated Interest Transactions
and Sale of Assets in Connection with Gas Ventures, Docket No. 98-077 (May 1,
1998).
No specific financing information has yet been filed by CMP NG. As in
Bangor Gas, it is not necessary for applicants to show that they have already
obtained financing and investment for a specific project to be granted full
authority to serve. However, as a public utility, prior to obtaining financing,
CMP NG must receive Commission approval under 35-A M.R.S.A. sect. 902.
D. Ability to Provide Service at Just and Reasonable Rates 1. Cost of
Service and Rate of Return Studies As discussed above, before awarding
unconditional authority to serve as a
public utility, we must determine whether CMP NG's project proposal merits
approval on its own terms -- i.e. whether it serves the public interest by
providing service that is safe and adequate at reasonable rates.
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7
We approved a comprehensive reorganization of CMP's corporate family into a
holding company structure under which CMP (the electric utility) and CMP NG
would be separate subsidiaries. The approved investment flows from the holding
company parent, not CMP (the electric utility).
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CMP NG witnesses described the total project and area-specific rate of
return, revenue projections, and cost of service estimates. CMP NG estimates its
cost of service by combining the area-specific construction cost estimates with
estimates of gas operation and maintenance expense. In addition, depreciation,
interest, and Federal and State Income tax expenses for each area are included
in the cost of service calculation.
a. Economies of Scale
CMP NG witnesses state that their project gains important economies of
scale from inclusion of the entire area CMP NG proposes to serve. To preserve
these economies, they urge approval of the entire proposed service territory. We
do not find that this argument adds much weight to CMP NG's request.
First, the particular economies of scale are not clear from the record.
The only apparent project aspect contributing to economies of scale is gas O&M.
Gas O&M expenses represent about of the proposed gas utility's annual expenses.
Where possible, gas O&M expenses have been broken down into direct costs by
specific project areas. Certain gas O&M costs however, are assigned to each area
based on the area's share of projected net revenues, year-end plant in service,
and directly assigned expenses.
Allocated costs represent approximately of the total gas O&M costs. It
may be inferred, therefore, that any economies of scale must derive from this
portion of total costs because they are costs which cannot be directly assigned.
This being so, the economies of scale must be relatively small since they are
based on savings from a relatively small piece of the annual expense pie. It is
even less clear whether, if CMP NG does not receive approval to serve in areas
that appear to promise smaller than average returns, the balance will be
significantly different.
We find similarly unconvincing is CMP NG's assertion that it may not be
able to serve smaller load areas if it does not succeed in also serving the
largest load areas of the state -- notably the Bangor and Bath/Brunswick coastal
areas. According to the evidence in this proceeding, NYSEG (comprising one half
of the joint venture's expertise base), has been particularly successful in
developing small customer load areas in upstate New York. We expect the same
possibility exists for development of small load areas in Maine and, given
NYSEG's experience, we would be disappointed if CMP NG did not pursue all areas
of the state that are feasible for development.
However, in light of our decision herein to open all of the proposed
areas to competition among LDC's, it is not necessary for us to find that such
economies exist. Rather, CMP NG will make its own determination as to which
areas it is economically able to serve at risk of by-passing an area which will
therefore receive service from another entity. Finally, a policy in which
investors bear the risk of project development, whatever its scope, insulates
ratepayers.
b. Marketing Assessment
The Towns and OPA have argued that CMP NG alone should receive an
unconditional certificate to serve the Bath/Brunswick areas, in part based on
the belief that CMP NG will have a higher market penetration or serve a higher
percentage of potential customers than Northern would achieve. The somewhat
confused record on this issue does not provide convincing support for this
conclusion.
CMP NG used historical penetration rates based on NYSEG's experience in
upstate New York. Similarly, Northern used historical penetration rates based on
its experience when it expanded service under normal marketing circumstances in
its current service territory.
There are some differences over the definition of penetration rate. Is
it: 1) the percentage of all businesses and households in a municipality, 2) the
percentage of potential customers in the portion of a municipality where service
infrastructure is available, or 3) the percentage of potential customers along
installed mains? All of these uses can be found in the record, often without
distinction. Because in many municipalities in both NU's and NYSEG's service
territories only a portion of a municipality is served, it is clear that the
first definition will often not be a useful measure for current purposes.
If we assume that the installation of mains is based on a prior
economic assessment, the third definition is probably the best measure of the
LDC's marketing success. Two similar utilities should arrive at roughly the same
economic assessments. It would seem that the second definition will reflect
differences in the spatial distribution of load, more than marketing success or
the economics of main location, which seems to be the more important issue in
estimating market potential or assessing marketing success. We make no attempt
to sort out the record here but request that all parties be clear and explicit
in any future presentations of penetration analyses.
In any event, what ultimately will drive the expansion of gas
infrastructure in Maine is the economics of providing gas service. In fact, both
CMP/NYSEG, and Northern testified that they would decide which loads to serve
based on economic analyses.
c. Revenue Projections
CMP NG's projected revenues are based on the customer penetrations,
load usage, and expected margins of each customer class. Specifically, the
revenues are a direct function of the rates charged and volumes transported.
While we are not fully persuaded that CMP NG's estimates here will be achieved
(for example, CMP NG witnesses have offered contradictory testimony on whether
penetration assumptions, and therefore revenues, include the loss of customers
to competing LDCs such as Northern and Bangor Gas),8 we do not view our concerns
as bearing on whether CMP NG should be permitted to try to achieve its revenue
objectives. Once again, the risk of failure is borne by shareholders, not
ratepayers.
d. Rate of Return and Financial Viability
CMP NG has projected area-specific rate of return calculations for all
municipalities included in CMP NG's Phase II certificate request. Aside from CMP
NG, only the Commission Advisory Staff and the OPA had access to this material.
While we might differ with the calculations of returns and whether
those returns are adequate, we choose not to second-guess entrepreneurial
investment decisions where investors, rather than ratepayers, are subject to the
risk of project failure or uneconomic expansion. Consequently, we will not
reject CMP NG's proposal on this basis if the Company submits a revised proposal
shifting risk as we describe below.
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8
CMP NG states that it did not expect to be awarded an exclusive franchise to
serve in its proposed areas yet all of its project calculations are based on
total potential customers in each area. CMP witness Kelley also stated that they
would not expect that it would be economically viable for CMP NG to serve only
part of an area, such as Bath/Brunswick, sharing the area with another gas
utility.
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2. Rate Plan
In this section we will examine some features of CMP NG's rate
proposals in order to assist CMP NG in preparing a revised proposal that
addresses our concerns.
a. Terms and Conditions of Service
We have not conducted an in-depth review of all of CMP NG's proposed
terms and conditions of service. Besides the features discussed here, the
details of proposed Terms and Conditions for CMP NG would require further
review, either in a compliance or further proceeding for review of a revised
proposal.9
b. Confidential Treatment of CMP NG's Rate Proposal The Towns complain
in their Brief that they have been precluded from a meaningful review of much of
the important information regarding CMP NG's proposal because of the
confidentiality restrictions. In particular, the Towns note they have had
a very limited opportunity to review the applicant's proposed rates, as
specific rates were subject to a protective order. As CMP/NYSEG's rates
will presumably soon become publicly filed tariffs, keeping this
information from public access during this proceeding makes little
sense.
We agree. However, it is not obvious that the Towns would have been precluded
from access to this information if they had requested a modification of the
protective order.10 We note that the Towns intervened very late in this case,
approximately one week prior to the hearings. As a result, perhaps all involved
simply overlooked the fact that the Towns did not have access to this
information.11
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9
MODA's issue regarding the "Service Contract" section of CMP NG's Terms and
Conditions could be considered in that review.
10
Under the terms of our standard protective orders, any party may seek to have
information removed from the protective terms where warranted. The Examiner
receivedno requests from the Towns.
11
Or there may have been other reasons that the applicants wished to keep the
information proprietary from the Towns that have not yet been articulated to the
Bench.
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As a general rule, we agree that proposed rate information should not
be proprietary and withheld from parties such as the Towns if it will be the
basis for approved rates. In this case, CMP NG sought protection, initially, of
rate information and other details of its marketing and business plan, in order
to keep competitors from gaining an undue competitive advantage. Later, all
parties except the Maine Oil Dealers Association (MODA) (and the
late-intervening Towns) were allowed access to this information.
Our regulatory policy is to keep the minimum necessary information
confidential because of the obvious public interest in the issues that come
before us. CMP NG is now on notice that, should it submit a revised rate plan,
it is unlikely that its details will be protected from parties with a legitimate
(i.e. not competitive) interest in the gas utility's rates.
c. Customer Charges
OPA and BGC have objected to CMP NG's comparatively high customer
charges. We have generally allowed customer charges or minimum bills that
collect all legitimate fixed customer costs. Moreover, where the utility is
essentially one of several competitors in a robust market, we are inclined to
grant significant flexibility in rate design. Nevertheless, we remain concerned
that rate design bear at least some relationship to cost structure.
The record on customer charges in this proceeding is insufficient to
reach a decision on whether the proposed charge is "close enough" to costs. We
will delegate the review of this charge to the Director of Technical Analysis,
requiring that the Director find only that the charge bears a reasonable
relationship to cost. We will require CMP NG to make the level of its charges
and rates known to potential customers. As long as customers are aware of the
utility's proposed monthly charge, they will possess sufficient knowledge to
decide for themselves whether they wish to accept service from CMP NG or to
select another fuel alternative. Given our stipulation that investors will bear
the risk of CMP NG's project development in a competitive market, the matter of
rates and charges is more a marketing issue for CMP NG, than a rate matter
requiring exhaustive regulatory review.
d. Composition of Base Rates
Various objections have been made to CMP NG's "base rates" including
gas costs. We have allowed the inclusion of gas costs in base rates, provided
the utility discloses to customers 12 what costs are for gas and what costs are
for local distribution.13 Similarly, we do not object in principle to including
legitimate upstream transportation and storage costs in gas costs, again
provided that the utility disclosures make these cost distinctions intelligible
to customers, especially to allow them to assess their options under gas-on-gas
competition and unbundled services. However, given the current movement toward
unbundled services and rates designed to foster gas commodity competition, we
may in the future require CMP NG to more clearly present gas costs and rate
information, thus to facilitate customers' understanding and ability to
participate effectively in competitive, unbundled gas commodity markets.
e. Late Collection Fee
CMP NG's proposed late collection fee of $98 far exceeds existing
utility late collection costs in Maine and nationally.
Because we are opening service areas to competition between gas
utilities and because gas utilities will be subject to competition from fuel
alternatives, the necessity for strict regulation of rates and charges or a
requirement that such charges be strictly cost-based is diminished. As with the
customer charge noted above, if a plausible case can be made to support a
finding by the Director of Technical Analysis that the charge is reasonably
related to cost, we will allow it on condition that CMP NG disclose to every
customer potentially subject to it what the charge is and when it will be
applied. With CMP NG's investors absorbing development risk, this charge becomes
primarily a marketing issue for CMP NG, placing it at risk that potential
customers will not find significantly higher-than-historic late collection
charges an acceptable term of service and decline to take the service offered by
CMP NG.
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12
CMP NG should provide all information in which it makes this disclosure to
customers for our review. We expect that this would include terms and
conditions, marketing or advertising information and possibly contracts.
13
Northern's current, but not its proposed, base rates are designed in this
manner.
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f. Gas Costs
The Examiner's Report concluded that CMP NG's gas cost projections are
understated because it has not factored in necessary supply costs in developing
its projections and gas price indices. This may account for some the instances
where CMP bills are lower.
As in Bangor Gas, the condition that investors will bear the risks of
project failure eliminates the need for us to ensure that CMP NG's projected gas
costs are accurate because ratepayers will not be subject to the risk that rates
will be higher than currently projected. If ratepayers were at risk for CMP NG's
gas costs, we would require a more complete demonstration of the basis for CMP
NG's gas cost projections, including detail on how it would obtain supplemental
supplies and what effects this would have on overall gas costs. With the
condition of investor risk, however, we need only review CMP NG's proposed
resource plan to determine that it is realistic and that it will have adequate
gas supplies to provide the services that it proposes.
g. FPO and IPO Gas Pricing Options
Parties and Advisory Staff expressed a number of concerns regarding CMP
NG's FPO and IPO gas pricing options. In particular, Staff questioned whether
Henry Hub futures or spot prices can be relied on to predict CMP NG's gas costs,
which will be incurred (at least in part) in different supply regions,
especially Sable Island and western Canada, under competitive conditions that
are yet to be observed. Similarly, Staff doubts that NYMEX oil futures or spot
prices will be good predictors of CMP NG gas costs. Finally, certain parties
assert that unbundling and gas-on-gas competition will be distorted if CMP NG
gas prices do not reflect its market gas costs and it is also possible that
differences between actual gas costs and gas revenues derived from an oil/gas
average price could cause CMP NG to prefer sales over transportation service. On
the other hand, CMP NG presented plausible evidence that the indices it chose do
bear some relationship to changes in gas costs (however measured) over time.
We find CMP NG's proposed rate offerings acceptable and do not believe
that a different treatment of gas costs (such as a traditional cost of gas
adjustment (CGA)) is necessary. Competition, coupled with the placing of project
failure risk squarely on shareholders, substantially reduces our concern over
how rates are developed. Customers may decide for themselves whether or not they
find the price structure offered by CMP NG attractive before committing to it.
We decline here to second guess the entrepreneurial instincts of business
developers where the risks of failure to achieve market acceptance do not fall
on ratepayers.
Moreover, if necessary in the future, we may require CMP NG to inform
its customers about gas costs so that they will be better able to participate in
the competitive market for gas supply once it develops.
3. Corporate Organization
Bangor Gas argued that we cannot grant CMP NG any authority beyond
conditional authority because the entity purporting to provide gas service (CMP
NG) has not been created and CMP's proposed corporate reorganization into a
holding company structure had not been approved by the Securities and Exchange
Commission (SEC).14
CMP responded in brief that the matter of its formal corporate
organization could be easily resolved simply by having the Commission modify
here its order in Docket No. 98-077 to permit CMP to create and own a gas
company subsidiary on a temporary basis until the final approval of the SEC for
the holding company reorganization is obtained.
We have considered and approved CMP's proposed reorganization, the
formation of and investment in subsidiaries under a holding company structure
for the purpose of becoming a gas utility in Maine.15 See Central Maine Power
Company, Application for Approval of Reorganizations, Affiliated Interest
Transactions and Sale in Connection with Gas Ventures, Docket No. 98-077 Orders
dated May 1, 1998 and June 10, 1998 (approved formation of subsidiaries of
holding company and permissible investment limitations). See also Central Maine
Power Company, Request for Approval of Affiliated Interest Transaction and
Reorganization and Transfer of Assets, Docket No. 97-930, Orders dated May 1,
1998 and June 30, 1998 (approving holding company reorganization).
We have not considered or approved (because CMP did not request that we
do so) whether CMP could, in the interim,
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14
CMP reported at the end of hearings that it did not know when an SEC ruling will
be issued.
15
The approved gas-related subsidiaries of the holding company are Gasco and Maine
Natural Gas Limited Liability Company, now renamed CMP Natural Gas. The
investment is approved from the holding company, not from CMP.
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form and invest in a subsidiary to operate as a gas utility. In our Order in
Docket No. 98-077 at p. 9, we explicitly stated:
For purposes of this order, we approve the transactions and
arrangements contained in the Joint Venture Agreement subject to the
condition that the Agreement be transferred to Gasco. We do not here
approve CMP's entering into the joint venture agreement. If CMP itself
wants to pursue this venture, it must seek separate approval of the
Commission.
Therefore, we do not now know whether we would allow CMP to create and invest in
a gas subsidiary.
While we applaud CMP NG's aggressively pursuing competitive
opportunities for natural gas distribution company development in Maine, there
are necessary preconditions that it must meet before it can proceed as a public
utility.16 Until the SEC approves the proposed holding company structure or
until CMP obtains additional reorganization approval from this Commission,
formation of or investment in 17 the gas entity is not permitted.18
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16
CMP mischaracterized the ER on this point as presenting a reason for denying its
current project application. See Adelburg (oral exceptions) at Tr. I-16-17. See
also CMP's July 20, 1998 Motion for Reconsideration of our Order Granting
Certificate to Bangor Gas Company in Docket No. 97-795 at 2. This point was made
simply to confirm that additional time would be required for CMP NG to resolve
these matters, delaying its in-service timing goal, and to make clear what steps
were necessary in the event CMP wished to proceed pursuant to another form of
organization.
17
35-A M.R.S.A. Section 708(2) states: "Unless exempted by rule or order of the
commission, no reorganization may take place without the approval of the
commission." Section 708(1)(A) defines reorganization, in part, as: "any
creation....of an affiliated interest as defined in section 707..."
18
On August 12, 1998, CMP filed a letter reporting that it had received SEC
approval and provided a copy of the SEC's order dated August 7, 1998. CMP states
that it is working toward a September 1, 1998 effective date for the
organization of CMP Natural Gas and the implementation of the holding company
structure. Thus, these organizational issues are largely moot.
------
4. Conclusion
Our assessment of CMP NG's proposal reveals that its estimates of gas
costs and time required for system construction may be understated; its
penetration and revenue levels may be overstated. And, even using CMP NG's own
assumptions and estimates, CMP NG has not shown that
Under traditional regulatory treatment,
, are realistic possibilities.19
Consequently, we will only fully authorize CMP NG to serve the proposed
municipalities if it puts forth a rate freeze or cap proposal that clearly
protects ratepayers from the risk of marketing and pricing error and of
uneconomic development. In this way, consumers will be protected from
potentially adverse impacts of entrepreneurs' decision during project
development even beyond the protection they will have from the existence of
competitive alternatives.
Much of CMP NG's proposal and activities to date -- such as its
engineering and operational expertise and its expansion enthusiasm -- display
positive attributes that recommend a grant of service authority in Maine.
Accordingly, we urge CMP NG to present a revised proposal that would protect
ratepayers from the risks of project development assumptions and uneconomic
system build-out. Such a proposal would be granted prompt approval.
VII. ANALYSIS OF NEED AND PUBLIC NECESSITY
CMP requests unconditional authority to furnish gas service to six
areas comprising of various municipal groupings: the Bath/Brunswick coastal
area, the Windham area, the Augusta area, the Waterville area, the Bangor area,
and Bethel. Many of the areas for which CMP NG requests service authority
include small communities for which gas service would not be economical on a
stand alone basis without large anchor customers or additional customer base.
A. Need
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19
MODA argued that the possibility of rate increases in CMP NG's rate plan affects
the terms of competition between oil and gas providers and creates asymmetric
risks that are adverse to oil dealers. MODA urges us to ensure that competition
between oil and gas will not be unfairly skewed by regulatory effects.
Accordingly, MODA argues that the risk of its venture should be placed on the
company, not consumers.
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CMP NG must demonstrate need for service in all proposed
municipalities. None of the areas is currently receiving gas service. The
demonstration of need, as defined in Mid-Maine, is straightforward in the entire
CMP NG proposed project area.
We hold that an applicant seeking to serve an area which is unserved or
to provide a type of service which is not being provided need make no
further evidentiary showing to demonstrate that a need for the proposed
service exists. Nor will such an applicant be required to demonstrate
that existing service to the area is inadequate. This rule shall apply
regardless of whether any other utility holds a franchise for the
currently unserved area or has authority to provide the service not
currently provided.
Mid-Maine at 10.
As further established in the Order, however, a showing of need does
not compel a grant of service authority.
A finding of need is not conclusive on the issue of whether or not an
applicant should be granted authority to provide service. The
Commission must also assess the technical and financial capability of
the applicant and address issues such as uneconomic duplication of
facilities, fairness to existing investors, and any other factor
implicated by the Commission's broad public policy statement.
Mid-Maine at 10.
Thus, we must consider whether it serves the public convenience and
necessity to authorize a second utility to serve in these municipalities.
B. Public Convenience and Necessity
1. Current Authority in Unserved Areas
Northern, Maine's only operating LDC, is currently authorized to serve
the entire state with the exception of the Bangor "core" area. Northern stated a
commitment to provide service in 1999 to the Bath/Brunswick coastal area (which
includes Bath, West Bath, Brunswick, Topsham, Freeport, Falmouth, Yarmouth, and
Cumberland) and is currently providing service to nearby communities. Northern
presented evidence in this proceeding of cost and service economies that exist
for it to expand its existing system to provide service to "contiguous" or
nearby areas, specifically Bath, Brunswick, Freeport, Topsham, Falmouth, and
Yarmouth.
For these areas, Northern provided evidence of its plans to serve these
municipalities and proposes to serve the Bath/Brunswick/Freeport areas by the
1999 heating season and the southern coastal area (Freeport, Yarmouth, and
Falmouth) by December 31, 1999.
Similarly, in the "core" Bangor Area (i.e., Bangor, Brewer, Orono, Old
Town, and Veazie), Bangor Gas is authorized to serve. In June, Bangor Gas began
to construct the infrastructure necessary to serve this five-municipality, or
"core", Bangor area upon the arrival of gas via the proposed Maritimes pipeline
in 1999.
In all remaining areas, Northern is authorized to serve but currently
has offered no concrete plans or other evidence to demonstrate that it will soon
do so. These areas include Windham, Waterville, Augusta, Bethel, and the
communities surrounding the Bangor area (Milford, Hermon, Holden, Hampden,
Orrington, and Bucksport).20 With the exception of Windham, these areas are not
near Northern's existing infrastructure, and whether it will ever actually serve
these areas is uncertain.
The policy we established in Mid-Maine, and confirm in this Order,
dictates that we would authorize additional utilities to serve in all of these
areas, barring convincing evidence that it would not serve the public interest.
We must determine, then, whether there are particular economies or other factors
that weigh toward limiting service in these areas to just one LDC. We will do so
by discussing these areas in sequence.
2. The Bath/Brunswick Coastal Area
Because of the public policy we have established and because the
evidence does not persuade us to the contrary, we find that the public interest
requires a second utility to serve the communities defined in CMP NG's request
as the Bath/Brunswick Coastal Area: Bath, West Bath, Brunswick, Topsham,
Freeport, Yarmouth, and Cumberland.
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20
BGC has also recently requested authority to serve in surrounding towns in the
Bangor area (Docket No. 98-468).
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We now review the evidence and arguments raised in this proceeding in
order to explain our assessment of that evidence and our reasons for concluding
that this evidence does not outweigh our determination that competition to serve
will best serve the public interest.
a. Cost
The Examiner's Report concluded that because Northern's existing system
infrastructure runs through adjacent or nearby communities,21 Northern's cost to
serve the Bath/Brunswick and southern coastal communities will be lower than CMP
NG's. The Report gives the following reasons:
- To reach consumers in the Bath/Brunswick area, CMP would have to
install substantially more miles of steel distribution main at greater
cost per foot and at greater total cost than does Northern. - CMP will
incur additional costs to serve the Bath/Brunswick coastal area because
it will need to construct an LDC city gate or "take station" interface
with the transmission pipeline at substantial cost to obtain its gas
supply. Northern will not have to incur such costs to serve the
Bath/Brunswick or coastal area because it can serve the area using gas
supplied to its system through the same tap to PNGTS as it will use to
serve its existing customers. - Northern will not have to build service
centers or add personnel to serve Bath/Brunswick coastal areas. Because
CMP is a start-up utility without an existing in-state presence, it
must incur these additional costs.22
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21
These municipalities include Lisbon Falls, Lewiston, Auburn, and Portland.
22
The testimony of Messrs. Eastman, Miller and McCarthy indicates that new
employees will have to be hired, some will need to be trained, and a service
center will either have to be built or space rented from CMP.
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We do not find this evidence compelling. While it may be true that
Northern could serve the Bath/Brunswick coastal region at lower total cost than
can CMP NG, the record does not allow us to make that determination with
sufficient certainty of the magnitude of the cost difference to provide a basis
to restrain competition in the area. Nor would we be inclined to change our
decision even if we could establish with certainty that expansion to the area
would be at substantially lower cost for Northern. It is not clear that lower
cost will mean lower prices to consumers: competition may sufficiently suppress
price to all classes of customers that service would be provided at lower prices
and margins, if not cost.
Consequently, we do not find that the public necessity requires us to
limit service to this area to Northern on this basis.
b. Failure to Serve
Throughout this proceeding, CMP NG has argued that it should be allowed
to serve these areas because, despite having authority to serve these areas,
Northern has neglected to do so. We find this "evidence" to have no value
whatsoever.
We are fully aware of the gas supply constraints that Northern has
faced and the measures it has taken in recent years in response to those
circumstances. Northern has acted prudently to contain its growth within
available supply levels.23 There is no doubt that the potential reduced level of
supply that would exist without fortuitous extensions of the Portland Pipe Line
lease or without the successful completion of the Portland Natural Gas
Transmission System (PNGTS) would have left Northern in a precarious position
with respect to its ability to maintain supply to its existing customer base.
Furthermore, CMP itself acknowledges expansion of the gas industry in
Maine has been constrained by a lack of interstate pipeline capacity and that
expansions depend on these new sources of gas supply.
Therefore, we do not find that Northern has neglected or failed to
expand its system when conditions would have otherwise allowed.
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23
During 1997, Northern held a number of meetings with the Commission to discuss
its contingency plan and partial marketing moratorium. In Docket No. 97-311,
Northern requested, and the Commission approved, terms and conditions enabling a
moratorium on active sales and promotional efforts, and to allow a freeze on
connecting new services, if it became necessary.
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We offer no further comment at this time on the contention that
Northern has responded too slowly to the demand and interest that has been
developing in the Bath/Brunswick coastal area in anticipation of PNGTS's being
in-service in late 1998. What is apparent on this record is that Northern is now
moving ahead with development. We believe that it is clearly in the public
interest for Northern to expand its system or increase penetration in a safe,
adequate, and economic manner wherever possible.
c. Commitment To Expand
Northern has demonstrated that it will be cost-effective for it to
serve the Bath/Brunswick coastal area. he communities of Bath and Brunswick are
part of Northern's 1998/1999 expansion plans. In addition, the CMP NG intends to
serve the Falmouth to Freeport areas in 1999. Northern's management has
specifically approved expanding its system in the Bath, Brunswick, and Freeport
areas without waiting to contract with anchor customers.
The development of the CMP NG system in all areas contained in its
application depends
When asked whether CMP NG would continue to develop LDC infrastructure
absent Mr. Kelley indicated that project economics would require
further review.
This difference in emphasis on obtaining anchor customers likely reflects the
cost and risk differences faced by the two entities. It also lends an element of
uncertainty to CMP NG's proposal to serve in any particular area, at least until
However, CMP NG's strategy is consistent with prudent business practice
in that it follows a tiered approach. Initially, the distribution system will be
built to serve large, so-called anchor, customers that wish to have gas service.
From these mains, CMP NG will only extend its system to areas where there is a
manifest interest to have gas service. In short, investment will be made only
when it makes economic sense, i.e. sufficient demand for the service is a
prerequisite for any capital outlay.
In sum, while the record evidence suggests that Northern's proposal to
serve the Bath/Brunswick and coastal area may be a more secure and
cost-effective manner to serve these areas, we do not find that these benefits
are sufficiently clear or compelling to outweigh the benefits of allowing
competition for service to this area. Thus, we find that competition among LDC's
best serves the public interest.
d. Economies of Scale
We have also reviewed the estimated costs to serve the loads in the
area and the market studies of both CMP NG and Northern. It is not surprising to
find that both companies would attempt to recruit many of the same potential
"anchor" customers. Because the market is relatively small and geographically
concentrated, we expect that the two companies would also compete for many of
the smaller customers and loads identified in their market studies. The cost
studies reveal that a significant initial capital investment is required by
either firm to extend service to this market area. Were we to allow two firms to
serve in this area, the evidence suggests that the result would be higher total
costs to serve essentially the same loads; a demonstration that subadditivity of
costs exist in the extension of gas service to the area. Because we do not here
allow costs eventually to translate into rates, however, it is not clear that
choosing the lower cost option to obtain the same service best serves the public
interest and convenience.
e. Timing
The Towns urge us to grant CMP NG service authority because it has proposed to
provide service earlier to the Bath/Brunswick coastal area. Northern argues that
CMP NG's time frame for construction is not feasible and notes contradictory
statements made by CMP/NYSEG witnesses regarding the speed with which they could
construct a distribution system and serve the area.
We agree that a number of factors weigh against CMP NG's projected
timetable, such as its incomplete corporate organization, winter construction
moratoria, uncertain anchor customer commitments, and other preliminary
construction matters. Additionally, Northern's decision to lower costs by
beginning construction in the spring of 1999 appears to be reasonable. Northern
also stated that it could press forward on an earlier schedule if necessary.
In light of the customer and municipal interest in the area, we
encourage any entity to explore the possibility of meeting service needs of
potential customers in the Bath/Brunswick area earlier if it can be done
economically. We do not find the timing of proposed service by either Northern
or CMP NG to provide a basis for or against authorizing CMP NG.
f. Rate Comparisons
A number of rate comparisons between CMP NG and NU have been offered in
this proceeding. The most comprehensive and comparable is the joint response of
CMP NG and NU to ODR-05, which is based on a number of shared assumptions,
although the two utilities use different methods for determining gas costs. The
rate comparisons consist of a series of 26 total bill comparisons, where bills
for assumed usage levels are calculated using CMP NG rates and NU rates. Bills
are calculated for the years 1998, 2000, and 2002, in order to reflect the
effects of projected changes in NU's rates (CMP NG's rates are assumed not to
change during the entire period of the comparison).
As might be expected, some total bills are lower for CMP NG, some are
lower for NU. In a number of cases the comparison shifts over time in favor of
NU, as NU implements its proposed series of phased-in rate reductions to larger
customers.
Our overall assessment is that these rate comparisons, based in part on
projections of future costs of gas, do not show any clear superiority of one
utility's rates over the others of such significance that our decision on
whether a second utility is required in Bath/Brunswick would turn on this issue.
Even if one was clearly superior, these rate comparisons would provide an
uncertain basis for such a decision for several reasons. First, we note that we
have not approved either of these rate proposals.24 In addition, as noted above,
the gas cost component of the CMP rate may understate costs and rates. More
importantly, even if proposed rates were approved, neither utility guaranteed
that it will not seek increases during the period of the comparison.
In sum, we conclude that these rate comparisons do not provide an
adequate basis for deciding whether public convenience and necessity requires a
second utility in the Bath/Brunswick areas.
g. Bath/Brunswick Coastal Area Conclusion
In sum, based on our determination in Mid-Maine and the evidence in
this proceeding, we find that it will better serve the public convenience and
necessity to authorize a second utility to serve in what has been defined as
CMP's Bath/Brunswick project area, if presented with a revised proposal
addressing the concerns described in this Order.
3. The Bangor Area
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24
Northern's rate proposal is currently under investigation in Docket No. 97-393.
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As noted above, Bangor Gas has authority to serve Bangor, Brewer,
Veazie, Old Town, and Orono. Bangor Gas proposes to construct a local
distribution system in this area during 1998 and 1999 and to serve these
municipalities when the Maritimes pipeline is placed in service in 1999.
Northern is authorized to serve the nearby towns identified in CMP's petition
but has not presented plans to serve the area.
We will authorize CMP NG to serve the communities it defines in its
petition as the Greater Bangor Area if it files a revised proposal that
addresses the concerns we have outlined in this order.
Again, we believe competition will reflect the economic efficiencies
and guide the development of providing local distribution service to the greater
Bangor area.
The economics supporting the provision of service to these communities
demonstrates that it is uncertain whether the balance of costs and revenues in
these areas would support more than one local distribution utility. To the
extent the customer base is shared between the two utilities, the unit cost to
serve will be higher for remaining customers of each entity and the possibility
of an acceptable return on project investment to each entity is diminished. For
more than one entity to serve the Bangor area will require more taps into the
pipeline and other duplication of costs to establish two foundational sets of
facilities and services. However, we are confident that the workings of the
competitive market will determine whether one of the entities, or both, will
serve the area.
Moreover, our review of the development plans of Bangor Gas and CMP NG
reveals a different marketing and expansion strategy. CMP NG's system
development philosophy Bangor Gas's proposal does not
Perhaps, then, there may be separate roles for the two entities in the
area. As previously stated, we will revisit this issue if evidence to
the contrary
is brought forward. We have within our power various options to remedy the
situation if service to the area is unreasonably lacking at any point in the
future. At this time, however, we do not find that to be the case.
4. The Augusta, Bethel, Waterville, and Windham Project
Areas
As indicated in our Phase I Order granting conditional authority to CMP
NG in this docket, we believe that CMP NG has the technical and financial
ability to serve as a public gas utility in these areas. Need exists in these
areas by virtue of the fact that no service is currently being provided. In
addition, no compelling evidence has been presented to persuade us that
certificating an additional utility to compete to serve the area does not serve
the public interest. These facts lead us to conclude that we will grant CMP NG
service authority in these areas if fully satisfied with its project details.
C. Suspension of Service Territory Authority
CMP NG seeks authority to serve several areas in which Northern has had
service authority for nearly 30 years but does not currently furnish service.
See n. 2. Prominent among these areas is the Bath/Brunswick area, which Northern
argues it has been planning to serve and which is contiguous to its existing
system. In this proceeding, Northern presented its plans to construct and serve
this area during 1999. The evidence shows that Northern will likely be able to
serve the area at a lower cost than could CMP NG.
The OPA argued that the Commission should suspend Northern's authority
to serve in these areas and, in its stead, CMP NG should be granted authority to
serve them. OPA believes that CMP NG has been more aggressive in its efforts to
serve the area and the risks to consumers of allowing two LDCs to develop the
same area outweigh any benefits.25 These risks include: the possibility of
inefficient expenditure of resources, the negative effects of utility failure,
the substitution of municipal permitting officials for utility regulators in
controlling development of utility service, and inviting "bidding wars" to
secure critical anchor loads with adverse impacts on small consumers' rates.
The Towns also urge the Commission to exercise its authority to prevent
potentially harmful "trench warfare" that would likely occur between two
authorized utilities competing to serve the Bath/Brunswick coastal area.
Accordingly, the Towns suggest that the Commission declare that
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25
Although OPA bases its recommendation on its belief that it is poor public
policy to grant more than one LDC service authority in a municipality, it then
argues contradictorily in its Brief that it "cannot oppose granting CMP a
certificate in the Bangor area" because it was without an "evidentiary or
procedural basis" to do so. Logically, sound public policy would apply equally
to both areas.
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in general, once an LDC begins providing service in a given town, the
burden should shift to any other LDC to demonstrate that competitive
service in that municipality will be in the public interest; i.e. it
will result in better service available to more customers at
competitive rates, and not poorer service to fewer customers at higher
overall rates.
In other words, the Towns argue, "Northern's authority to serve the Towns should
be modified to be made essentially `conditional'." As such, the Towns explain,
Northern could not commence construction until it presents and the Commission
approves specific construction, marketing, financial, and resource plans, such
as have been reviewed for CMP/NYSEG in this proceeding.
The requirement suggested by the Towns (concerning construction plans)
appears consistent with the language of 35-A M.R.S.A. Section 2102 which
requires the Commission to approve the expansion of a public utility into a
municipality in which another public utility is already authorized to serve.26
It also presents a fair and consistent policy with respect to our exercise of
authority in supervising and approving the furnishing of public utility service
to municipalities should the competitive policy prove unworkable.
In light of our conclusion that competition to provide local
distribution service best serves the public interest, we will not limit
Northern's (or any other previously authorized utility's) ability to compete to
serve the areas in which we authorize CMP NG. We will, however, keep this
possibility in mind for future situations in which limitation of authority may
be warranted. Additionally, pursuant to 35-A M.R.S.A. sect. 1321 and 1322, we
can reopen our orders granting service authority and modify them as we determine
warranted.
D. Reporting Requirement for All Authorized LDCs
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26
Section 2102, on its face, is applicable to any authorized public utility,
regardless of whether it was authorized prior to or subsequent to another
authorized public utility. By monitoring and affirmatively approving when an
entity may furnish service in any municipality once another public utility is
authorized, the Commission could control the entry and provision of monopoly
utility service in any area. Such control could be used to guard against the
development of duplicative or uneconomic, or otherwise adverse, facilities and
service.
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Due to the concerns that competitive pressure might create unforeseen
problems, and to ensure that nothing we do herein discourages some entity from
moving ahead in a timely and aggressive manner to serve the area, we will
monitor all authorized utilities' progress to ensure that system development and
service to this and other areas are accomplished within a reasonably expeditious
and certain period of time. We will require all authorized utilities to report
on their system expansion progress every six months, beginning October 1,
1998.27
Public utilities have an obligation to serve within their service
territory where it is economic to do so. Moreover, it is within our authority to
require a utility to serve where we determine it is reasonable and necessary,
such as where a demonstrated demand for the service exists. Alternatively, we
could find that that the public interest would be better served by authorizing
another entity to serve an unserved area.
VIII. NECESSARY TERMS OF REVISED PROPOSAL
We will grant service authority to CMP NG in all of its proposed
project area, if it presents an acceptable revised proposal. First, CMP NG
should revise its rate plan to assure us that CMP NG's proposal has addressed
the concerns we have identified with respect to particular rates, that the rates
will remain stable over time, and that the risk of errors in project cost or
revenue estimates will not be borne by ratepayers. Shareholders must bear the
risks of uneconomic development. We emphasize that we do not require any
particular relationship between "costs" (however estimated) and prices. We fully
expect CMP NG to set its prices at levels that will enable it to attract
customers. As we found in Bangor Gas, the discipline of the market is likely to
be superior to our own prognostications concerning cost and customer behavior.
See Bangor Gas Order Approving Rate Plan (June 26, 1998) and Order Granting
Unconditional Service Authority (June 30, 1998). We insist, however, that
whatever price levels CMP NG chooses to offer -ratepayers not be at risk for
rate increases to save investors from the consequences of their own poor
projections. It is true that, at some level of increase, ratepayers will likely
convert (or convert back) to another fuel source. It would be poor regulation,
however, to place ratepayers at risk even of reconversion costs where, as we
find here, shareholders should bear the risk (and, not coincidentally, enjoy the
benefits) of their investment choices. Our primary examination of CMP NG's
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27
We will issue separate notification to all LDCs to this effect with additional
details.
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proposal,then, will be whether risks have been allocated appropriately.28 Also,
prior to beginning construction or contracting with customers, CMP NG
must meet the conditions regarding formation of a gas venture specified in our
conditional certificate approval. Finally, CMP NG must present a more complete
resource plan.
In the event that a revised CMP NG proposal is crafted quite differently in
its operational and engineering or other supporting details, it will be
necessary to review and approve the modifications in order to grant
unconditional authority to serve in the remaining project areas. Because these
are fundamental elements of our review to determine whether a proposal serves
the public convenience and necessity, we will not grant CMP NG unconditional
authority without reviewing modified project information.
XI. CONCLUSION
For the foregoing reasons, we do not grant CMP NG unconditional
authority to serve in its proposed areas at this time, but will do so upon
submission and approval of an acceptable revised proposal as outlined in this
Order. Dated at Augusta, Maine this 17th day of August, 1998.
BY ORDER OF THE COMMISSION
---------------------------
Dennis L. Keschl
Administrative Director
COMMISSIONERS VOTING FOR: WELCH
NUGENT
This document has been designated for publication.
Appendix A: Procedural History
Phase I
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28
Our decisions in Bangor Gas should provide guidance in this area.
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On December 20, 1996, CMP filed a petition for approval to furnish
natural gas service in 60 municipalities that may be served from the Maritimes &
Northeast Pipeline (MNE) or Portland Natural Gas Transmission System (PNGTS)
including Rumford, Mexico, Dixfield, Bethel, Farmington, Wilton, Jay, Livermore,
Livermore Falls, Millinocket, East Millinocket, Medway, Lincoln, Howland, Orono,
Old Town, Milford, Veazie, Bangor, Brewer, Hampden, Orrington, Bucksport,
Clinton, Waterville, Winslow, Fairfield, Madison, Oakland, Skowhegan,
Norridgewock, Augusta, Gardiner, Randolph, Hallowell, Farmingdale, Manchester,
Winthrop, Topsham, Brunswick, Bath, Freeport, and Yarmouth. With its direct
testimony, filed on October 31, 1997, CMP amended this list to include
Baileyville(Woodland), Bridgton, Casco, Durham, Gray, Harrison, Naples, North
Yarmouth, Norway, Otisfield, Oxford, Paris, Pownal, Raymond, Standish, and
Windham. A prehearing conference was held on March 5, 1997 at which the Hearing
Examiner granted the petitions to intervene of the Office of the Public Advocate
(OPA), Mid-Maine Gas Utilities, Inc. (MMGU), the Town of Jay, the Industrial
Energy Consumer Group (IECG), and Northern Utilities, Inc. (Northern). The
Examiner deferred ruling on the petitions of the Maine Council -Atlantic Salmon
Federation (ASF), MNE, Madison Electric Works (MEW), and the Town of Cumberland,
all of which did not appear at the prehearing conference. The list of parties
now includes ASF and MNE.
By Procedural Order dated March 12, 1997, the parties were invited to
comment by March 26, 1997 on a threshhold question as to whether it would serve
the public interest to allow an electric utility to also provide gas service.29
An Examiner's Report on the threshold issue was issued on August 25, 1997. The
Commission issued its Interim Order on September 26, 1997 holding that CMP's
application to provide gas service could be processed in accordance with the
standards of approval delineated in Docket No. 96-465 and that CMP would be
permitted to provide gas service only through a separate corporate subsidiary.
On October 27, 1997, CMP filed a proposed schedule for the remainder of
the proceeding to which several parties had indicated no objection. On October
28, 1997 CMP filed a Motion for Protective Order to allow it to limit
distribution to only Staff and the Public Advocate of certain market analyses
and confidential business strategy information. On October 29, 1997, the IECG
filed an objection to CMP's request to limit distribution to Staff and OPA. On
November 25, 1997, the Hearing
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29
On June 27, 1997, the Examiners assigned to this and three other natural gas
dockets (97-177, 97-267, 97-310) issued a Notice of Temporary Suspension of
these cases to allow the Commission to conduct a generic inquiry (Docket No.
97-267) into the development of the natural gas industry in Maine.
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Examiners granted the protective order and established a schedule for the
proceeding including a case management conference and hearings on January 26,
28, and 29. CMP filed its Direct Testimony and Exhibits on October 31, 1997. CMP
filed Confidential Exhibit QKE-6 pursuant to protective order on November 26,
1997.
The Examiner issued Protective Order No. 1 on December 5, 1997. The
IECG filed a Motion for Reconsideration with Incorporated Memorandum of Law on
December 15, 1997. CMP filed its response on December 23, 1997. The Examiners
denied the IECG's motion by Procedural Order dated December 30, 1997.
The Maine Oil Dealers Association (MODA) and Bangor Gas Company,
L.L.C.'s (Bangor Gas) late-filed petitions to intervene were granted by
Procedural Order on December 24, 1997 on condition that they "take the case as
they find it". MODA's intervention was limited to providing information
concerning gas and oil pricing, environmental comparisions, or conversion costs
and data at this stage of the proceeding.
None of the intervenors filed testimony in this proceeding.
The Examiners issued a Procedural Order on January 23, 1998 requiring
parties to provide prehearing memoranda outlining their cases for the hearings
scheduled for January 28th and 29th. On January 26, 1998, the Examiner held a
Case Management Conference at which CMP presented a draft stipulation supported
by CMP, the Public Advocate, and MNE. Northern Utilities indicated that it would
take no position on the stipulation.
Also on January 26, 1998, Bangor Gas filed a Motion to Compel Responses
to Data Requests it had issued on December 31, 1997. CMP objected, on January
21, 1998, that Bangor had filed its data requests well after the discovery
deadline that had been established in this case. Bangor Gas then sought to
obtain responses to its discovery through cross-examination at hearing. No other
party submitted areas for cross-examination of CMP's witnesses.
On January 27, 1998, by Procedural Order, the Examiners denied Bangor
Gas' motion to compel, overruled Bangor Gas' stated objection to CMP's
application, and canceled the scheduled hearings. That order also allowed
written comment by the parties on the proposed stipulation by February 4th. The
executed stipulation was filed on February 3, 1998. Objections to the
stipulation and to the application were filed by IECG and Bangor Gas.
An Examiners' Report was issued on February 20, 1998. Northern, IECG
and Bangor Gas filed exceptions. Deliberations were held on March 9, 1998.
By Order dated March 11, 1998 (March 11th Order), the Commission
granted Central Maine Power Company (CMP), on behalf of its joint venture with
New York State Electric and Gas (NYSEG), conditional authority to serve within
60 cities and towns in Maine pursuant to 35-A M.R.S.A. sect. 2104 and 2105,
finding that the joint venture possesses the general financial and technical
capability to serve as a public utility and that need exists in the designated
municipalities because natural gas service is currently not being provided in
those areas. The March 11th Order did not allow CMP to construct or operate a
natural gas system public utility until the Commission has reviewed and approved
detailed financing, construction and resource plans, granting CMP full, or
unconditional, service authority.
On March 31, 1998, Northern filed a Motion for Reconsideration of the
March 11th Order, claiming that the Commission failed to consider the overall
public interest in granting CMP authority to serve in an area where Northern is
already authorized to serve. Northern requested that the Commission reopen Phase
I to consider these issues in its determination of need, or, alternatively, to
consider these issues in Phase II of the CMP proceeding. Responsive comments
were filed by CMP, MNE, OPA, and Bangor Gas. Briefs on issues raised by
Northern's request for reconsideration were filed on April 17th by Bangor Gas,
OPA, CMP MNE,and Northern.
The Commission deliberated Northern's Motion for Reconsideration on
April 28, 1998 and issued its Order Granting Northern Utilities, Inc.'s Motion
For Reconsideration on May 14, 1998. Northern was allowed to supplement its
testimony in the Phase II proceeding to present public interest issues regarding
authorizing a second utility in areas in which Northern already was authorized
to serve.
Related Parallel Proceedings
In December 1997, CMP filed a request for approval of a comprehensive
reorganization of all its corporate affiliates into a holding company structure.
This was docketed as 97-930. CMP also requested that the Commission also approve
the formation and investment in a gas subsidiary of the holding company formed
for the purpose of becoming a public utility, as CMP NG. This was separately
considered in Docket No. 98-077.
Phase II
On February 23, 1998, CMP filed its "Phase II" proposal for unconditional
authority in thirty-five municipalities, including 1) the greater Augusta area
(Augusta, Gardiner, Hallowell, Farmingdale, Randolph, Chelsea and Manchester);
2) the greater Waterville area (Waterville, Fairfield, Winslow, Oakland and
Vassalboro); 3) the greater Bangor area (Bangor, Brewer, Old Town, Orono,
Veazie, Milford, Hermon, Holden, Hampden, Orrington and Bucksport); 4) the
Bath/Brunswick coastal area (Bath, West Bath, Brunswick, Topsham, Freeport,
Falmouth, Yarmouth and Cumberland); 5) the Windham area (Windham, Raymond,
Standish); and 6) Bethel.
The initial schedule for Phase II established intervenor testimony on
April 17th, a hearing on May 15th, and a final decision on the application by
June 26th.
The Examiner issued Protective Order No. 2, protecting information
relating to potential customers of the CMP/NYSEG joint venture, on April 2,
1998. Under Protective Order No. 3, issued April 13, 1998, CMP/NYSEG released to
Bangor Gas, Northern and MNE information relating to rates based on its project
planning assumptions. On May 5, 1998, a Protective Order was issued relating to
Northern's analyses of gas markets in Maine, project analyses and related
materials and business strategy information including financial, cost and market
information.
Technical conferences on the Phase II filing were held on April 10th
and May 7th.
On May 12, 1998, the Examiner issued a modified schedule for Phase II
to reflect the Commission's ruling on Northern's Motion for Reconsideration. The
schedule allowed CMP to file testimony on the additional issues raised by
Northern's motion, followed by an opportunity for intervenors to file testimony.
On May 13th, CMP filed a letter protesting the schedule, stating that
it had nothing further to present at this time on the issue of whether CMP
should be allowed to provide service in municipalities in which Northern is
already authorized to serve. CMP urged the Commission to resolve its application
as soon as possible.
On May 14th, the Examiner issued a revised schedule, finding that CMP,
as applicant, had waived its opportunity to file additional testimony, and
advancing the filing dates for Northern's opportunity to provide testimony. In
addition, the Examiner allowed other parties to file responsive testimony.
On May 15th, Northern filed a letter objecting to the May 14th
schedule. By Procedural order dated May 18, 1998, the Examiner further revised
the schedule and limited the scope of further testimony and hearings to those
areas that CMP had identified as priorities for 1998 construction: the
Bath/Brunswick area, Bethel, and the Windham/Standish area. The procedural order
also required CMP to propose by May 20, 1998, a separate schedule for the
remainder of the areas in which it seeks approval or, alternatively, to indicate
why it is not possible to bifurcate review of its application in this manner.
CMP filed nothing in response to this directive.
On June 1, 1998, Northern filed the testimonies of John Flumerfelt,
Patricia Dyer, and Danny Cote.
Hearings were held on June 17th and 19th. CMP witnesses supplied the
rebuttal testimony of Tim Kelly and Darryl Quimby. Northern's witnesses gave
brief oral surrebuttal. Cross-examination was allowed on all witnesses.30
Comments of the parties on whether there would be a need for further
proceedings to evaluate the remaining areas contained in CMP's application were
filed on June 24th by OPA, Bangor Gas, CMP, and Northern. No party requested
additional hearings or testimony at this time.
Briefs on CMP's entire application were filed July 1 by OPA, MODA,
Bangor Gas, CMP, and Northern. Reply briefs were filed by Northern, Bangor Gas,
CMP and MODA. The Examiner's Report was issued on July 13, 1998. Oral exceptions
were made on July 17th and deliberations were held on July 23, 1998.
- -----
30
Bangor Gas witness Jan Van Lierop was made available by telephone.
- ------
NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. sect. 9061 requires the Public Utilities Commission to give
each party to an adjudicatory proceeding written notice of the party's rights to
review or appeal of its decision made at the conclusion of the adjudicatory
proceeding. The methods of adjudicatory proceedings are as follows:
1. Reconsideration of the Commission's Order may be requested under
Section 6(N) of the Commission's Rules of Practice and Procedure (65-407
C.M.R.11) within 20 days of the date of the Order by filing a petition with the
Commission stating the grounds upon which consideration is sought.
2. Appeal of a final decision of the Commission may be taken to the Law
Court by filing, within 30 days of the date of the Order, a Notice of Appeal
with the Administrative Director of the Commission, pursuant to 35-A M.R.S.A.
sect. 1320 (1)-(4) and the Maine Rules of Civil Procedure, Rule 73 et seq.
3. Additional court review of constitutional issues or issues involving
the justness or reasonableness of rates may be had by the filing of an appeal
with the Law Court, pursuant to 35-A M.R.S.A. sect. 1320 (5).
Note:The attachment of this Notice to a document does not indicate the
Commission's view that the particular document may be subject to review or
appeal. Similarly, the failure of the Commission to attach a copy of this Notice
to a document does not indicate the Commission's view that the document is not
subject to review or appeal.
EXHIBIT D-2
Exhibit D-2
STATE OF MAINE Docket No. 98-077
PUBLIC UTILITIES COMMISSION
May 1, 1998
CENTRAL MAINE POWER COMPANY ORDER
Application for Approval of
Reorganizations, Affiliated
Interest Transactions and Sale
in Connection with Gas Ventures
I. Summary
In this Order we approve affiliated interest transactions and
reorganizations requested by Central Maine Power Company (CMP) pursuant to 35-A
M.R.S.A. sect. 707, 708, subject to certain conditions.
II. Background
On December 9, 1997, CMP filed a request for approval of a major
reorganization, including formation of a Maine-based holding company. This
request was assigned Docket No. 97-930. CMP requested approval of 21 separate
arrangements and transactions.1 Following a pre-hearing conference on January
14, 1998, the Examiner issued a procedural order requiring that certain issues
be taken up in a separate gas proceeding. The gas proceeding was assigned Docket
No. 98-077. All parties in Docket No. 97-930 were made parties to this
proceeding: Bangor Gas, Bangor-Hydro Electric Company, Coalition for Sensible
Energy, Enron, Industrial Energy Consumer Group, Independent Energy Producers of
Maine, Maritimes and Northeast Pipeline, Maine Oil Dealers Association, Northern
Utilities and the Public Advocate.
The Hearing Examiner identified the following five proposed
transactions as those the Commission would examine in Docket No. 98-077:
1. The transfer, lease or license by CMP of interests in its
rights-of-way and transmission and distribution structures to
entities involved in pipeline and gas distribution projects;
2. The transactions and arrangements described in the CMP Gas
Company, L.L.C. Joint Venture Agreement;
3. The creation of a limited liability company (referred herein
as Maine Natural Gas Company (See response to Advisors' Data
Request 01-01) to develop, own and operate a natural gas
distribution business in Maine in which a new wholly-owned
subsidiary of the holding company (HoldCo) will have a 50
percent membership interest and New York State Electric & Gas
Corporation or its affiliate will have the other 50 percent
membership interest.
4. The creation of the new wholly-owned subsidiary of HoldCo,
referred to as GasCo, that will hold a 50 percent membership
interest in Maine Natural Gas Company; and
5. The creation of one or more entities, one of which may be a
wholly-owned subsidiary of HoldCo, to participate in gas
distribution in New Hampshire.
The Examiner directed CMP to prefile testimony in support of its
request for approval of these transactions by February 12, 1998. CMP filed the
testimony of Arthur Adelberg in support of its requests. Parties conducted
discovery between February 23 and March 10. The only intervenor filing
responsive testimony was the Public Advocate. He sponsored the testimony of
Scott Rubin.
On March 26, 1998, CMP filed a motion for summary judgment. In the
Motion, CMP argued that following the filing of testimonies, there were no
material issues of fact and that any legal issues are addressed by Chapter 820
of the Commission rules.
The Examiner offered the parties an opportunity to respond to the
Motion. In response, the OPA claimed that two factual matters needed to be
resolved: whether the use of CMP's name in gas marketing constitutes use of the
corporate name necessitating payment of royalties under Chapter 820; and how
royalties owed will be determined. OPA otherwise did not contest CMP's motion.
Bangor Gas opposed the Motion on two grounds. First, it claimed that it
would be premature for the Commission to decide these five issues before
deciding whether to approve the holding company structure in Docket No. 97-930.
Second, Bangor Gas argued that the Motion was not supported by an affidavits or
a Statement of Material Facts Not in Dispute as required by Maine Rules of Civil
Procedure 7(d).
On April 15, 1998, the Hearing Examiner issued a draft proposed order
containing the recommendation of the Examiner and Advisory Staff. Parties were
allowed to file responses or exceptions by April 27, 1998. Only CMP filed a
response.
III. Standard of Review
The purpose of this proceeding is to consider five reorganization
requests that relate to CMP's planned entry into the natural gas business. As
proposed, the natural gas operations will be conducted by an affiliate of CMP.
This affiliate will be part of the reorganized holding company approved by the
Commission on May 1, 1998 in Docket No. 97-930. The gas operations will operate
as follows:
HOLDING COMPANY
/ | \
/ | \
/ | \
NYSEG GASCO CMP T&D OTHER SUBSIDIARIES
\ /
\ /
\ /
MAINE NATURAL GAS LLC
The Commission must find that the reorganizations are consistent with the
interests of the utility's ratepayers and investors. 35-A M.R.S.A. sect. 708
(2)(A). In granting the approvals the Commission may impose terms, conditions or
requirements it determines are necessary to protect the interests of ratepayers.
These may include conditions to assure: reasonable access to books and records;
the continued ability of the Commission to regulate transactions between
affiliated interests; the utility's continued ability to provide safe reasonable
adequate service; the utility's credit is not impaired or adversely affected;
and reasonable limits on total level of investment in nonutility business. 35-A
M.R.S.A. sect. 708(2)(A)(1-9).
CMP has proposed certain conditions applicable to these gas
reorganization transactions that the Commission could impose in approving these
transactions. These include:
1. The Commission would have access to all books and records of
GasCo and Maine Natural Gas Company, LLC;
2. The Commission would receive quarterly and annual financial
statements for GasCo and Maine Natural Gas Company, LLC;
3. As a regulated utility, Maine Natural Gas Company LLC's
transactions with affiliates would require Commission
approval;
4. Appropriate protections would be applied to proprietary
information;
5. Transfers of assets, at this time expected to be furniture and
computers, on the same terms as those established in Docket
No. 95-092 (e.g., allowing CMP to transfer assets with a value
not exceeding $100,000 per transaction up to an annual amount
of $1,000,000, without further Commission approval;
notification required for right-of-way transactions). In its
Motion for Summary Judgment, CMP claims such transfers of
assets would be governed by newly-enacted Chapter 820;
6. Dividends paid by CMP [T&D] to HoldCo must be based solely on
the financial performance, needs and health of CMP [T&D]
without regard to the rest of the holding company system; and
7. GasCo and Maine Natural Gas Company, LLC should be permitted
to form affiliates for the purpose of furthering the gas
business without need for Commission review or approval.
IV. Motion for Summary Judgment
Under the Maine Rules of Civil Procedure, applicable to the Commission
pursuant to 35-A M.R.S.A. sect. 1311, summary judgment may be granted only where
there has been a showing that there is "no genuine issue as to any material fact
and that any party is entitled to judgment on a matter of law." M.R. Civ. P.
56(c). As the Law Court has stated, "even if the parties differ as to the legal
conclusion to be drawn from the historical facts before the court, if there is
no serious dispute as to what those facts are, consideration of a summary
judgment is proper." North East Ins. Co. v. Soucy, 1997 ME 106 para. 8, 693 A.2d
1141, 1143.
CMP's Motion for Summary Judgment could also be viewed as a Motion for
Judgment as a Matter of Law pursuant to Rule 50(d) of the Maine Rules of Civil
Procedure. While there have been no hearings on this matter and no testimony has
technically been admitted as evidence, the Company's prefiled testimony is
properly before the Commission and hence part of the record for purposes of
considering this motion. Rule 50(d) allows a party to move at any time for
judgment as a matter of law on any claim.
Either type of motion raises the issue of how to treat a case where the
decision maker must make determinations on matters of public policy as well as
matters of fact and law. For this reason, Commission cases often do not lend
themselves to the rules that are applicable in the courts.
In this instance, CMP is asking the Commission to decide the case on
the evidence presented in its initial filing and prefiled testimony (and the
technical conference transcripts and data responses). No party has filed
testimony refuting the information presented by the Company. CMP also contends
that there are no factual issues in dispute that warrant a hearing.
The Commission agrees that this case can be decided based on the record
developed to date. The issues raised by the two parties opposing the Motion can
be adequately addressed in this Order and we do so as described below.
V. Analysis and Decision
A. Request 1 - Rights-of-Way
In its prefiled testimony and during the technical conference on
January 30, 1998, CMP stated that it no longer plans to transfer rights-of-way
to its affiliate gas interests. Since CMP is no longer requesting approval of
any transfers of rights-of-way, Request 1 is moot. CMP should seek Commission
approval prior to any future transfers.
B. Request 2 - Transactions and Arrangements described in the CMP
Gas Company LLC Joint Venture Agreement
Request 3 - Creation of Limited Liability Company
Request 4 - Creation of GasCo
The regulated natural gas distribution business will be operated as a
Maine limited liability company. The activities it may undertake are currently
the subject of a separate docket, Docket No. 96-786 (Phase II). GasCo will be
the entity that acquires the 50% membership interest in the LLC. CMP claims the
need to form GasCo to hold the limited liability interest in order for HoldCo to
maintain its "non-operating" characteristics. GasCo will not be a "gas utility"
because it will not own, control, operate or manage any gas plant.
The testimony of Mr. Adelberg describes how LLCs operate and the
advantages of such a formation. According to CMP:
The limited liability company ("LLC") combines aspects of both
corporations and limited partnerships. Like those two forms of
doing business, forming an LLC in Maine requires compliance
with certain statutory formalities, including the filing of
Articles of Organization with the Secretary of State. The
owners of an LLC are called "members" rather than
shareholders, and their ownership rights are referred to as
"interests." Like shareholders of a corporation, the liability
of members of an LLC is limited to their investment in the
entity. Unlike a limited partnership, members can actively
participate in the management of the business without
incurring liability to third parties. Rather than having a
member-run LLC, day-to-day operations can be delegated to one
or more persons that serves as a manager of the LLC. Use of an
LLC also has tax advantages. There is no income tax at the
entity level; rather, if the LLC is properly structured, taxes
are passed through to the members, just as with partners in
partnerships. The Maine LLC statute contemplates the use of an
operating agreement, which has as its parallel the partnership
agreement in limited partnerships, and in corporations, the
corporation's by-laws. Typically, the operating agreement
addresses management authority, membership, voting rights,
allocation of profits and losses, investments, and other
items. By combining the best features of corporations with
limited partnerships, that is, limited liability, management
flexibility and favorable tax treatment, the LLC provides a
particularly favorable structure for a joint venture between
two or more corporations, as is proposed by CMP and NYSEG with
respect to the gas LDC business. Use of the LLC form of doing
business will avoid the double tax situation that would exist
from corporate taxes on the participating entities and on a
new corporation, avoid the liability concerns for partners in
a general partnership, and avoid the questions of who should
serve as a general partner if a limited partnership were
employed as the organizational form.
No parties raised questions about the limited liability form of organization. As
described by CMP, it appears to be a reasonable form of organization for these
gas ventures. It also is reasonable for CMP to establish GasCo.
A number of issues arise about specific provisions in the Agreement.
Article II, 2.2. states that the name of the Company is CMP Gas Company, L.L.C.
CMP has recently clarified that it does not propose to use this name, due to
Chapter 820 royalty requirements. Although Chapter 820 will not be in effect
until after June 30, 1998, CMP has agreed that Chapter 820's provisions will be
applicable to these transactions.2 The rule will require the Commission to
establish for an initial 3-year period an annual amount that must be paid by the
affiliate for use of goodwill. The use of goodwill is conclusively established
where the affiliate uses the name of the utility or the affiliate engages in
joint marketing or joint advertising with the utility.
CMP asks the Commission to assume for purposes of this docket that the
name will be Maine Natural Gas, LLC (LLC). We will approve the Agreement with
the understanding that in the event CMP's name is used in the name of LLC,
Chapter 820's requirements will apply. CMP, in its response to the Proposed
Draft Order, also argues that it should be permitted to disclose the affiliation
of Maine Natural Gas to CMP without paying royalties. We reiterate that the
provisions of Chapter 820 will be applicable to this situation. Maine Natural
Gas, LLC's use of the CMP identity in its marketing or advertising constitutes
the use of goodwill under the definition in Chapter 820(2)(F). Chapter 820
includes a presumption that the goodwill is valued at 1% of the total
capitalization of the affiliate or 2% of the gross revenues of affiliate,
whichever is less. The rule specifically allows a utility to present evidence
that the value of the goodwill is less. Chapter 820 (4)(C). If CMP believes the
value of goodwill in the case is less than that presumed by the rule it should
make such a showing and ask for different treatment. Otherwise, Chapter 820
presumptions about goodwill will apply. The only exception we will allow to
Chapter 820's royalty requirements for the use of the name will be in situations
where a state or federal law requires such disclosure. In that case, disclosure
(limited to the minimum amount required by the relevant law) can be made without
payment of a royalty.
CMP also requested 60 days from the date of this Order to allow it to
inform "potential" customers of the name change of CMP Natural Gas to Maine
Natural Gas, without payment of any royalties. We will permit such
communications without royalty payments as long as the communications are
limited to informing persons who were previously contacted by CMP about the new
name for the purpose of avoiding confusion. This does not mean that CMP can
conduct a general advertising campaign, touting its affiliation with the
newly-named company, without paying royalties.
The agreement also includes a form support services agreement for
services provided by CMP to LLC. At this time we do not approve the agreement
between LLC and CMP included in Exhibit G, attachment to CMP's December 1997
filing in Docket No. 97-930. That agreement contains provisions that are not
consistent with Chapter 820. CMP should resubmit a revised contract complying
with the requirements of Chapter 820. We delegate our authority to approve the
agreement to the General Counsel upon her finding that the agreement complies
with Chapter 820.
The major provision of the Joint Agreement that we must consider is
contained in Articles IV, VIII and Exhibit A to the Agreement. These provide
that the initial capital contribution of each member will be $10 million. CMP
requests that the Commission authorize its GasCo subsidiary to invest $10
million in the limited liability company. No party disputes this $10 million
investment. We find that the investment of $10 million by HoldCo in GasCO is
reasonable. Since this investment is made by HoldCo to GasCo, it helps to
insulate CMP's ratepayers. As a subsidiary of HoldCo, CMP's capital structure
and cash flows would be unaffected by HoldCo's investment in GasCo and therefore
CMP's ratepayers would be well-insulated from any risks that would flow from
this investment. This gives us confidence that HoldCo's participation in this
project will not harm CMP's ratepayers. CMP in its response to the Proposed
Draft Order suggests that this limit should only apply until Maine Natural Gas
is granted its gas distribution franchise. We believe the limit as proposed in
CMP's original application is appropriate. If CMP desires to invest additional
amounts at a later date, it can seek approval at that time.
Finally, we note that the Agreement is between CMP and NYSEG. Article X
of the Agreement permits the transfer of any membership interest acquired by CMP
to another entity in its holding company. For purposes of this order, we approve
the transaction and arrangements contained in the Joint Venture Agreement
subject to the condition that the Agreement be transferred to GasCo. We do not
here approve CMP's entering into the joint venture agreement. If CMP itself
wants to pursue this venture, it must seek separate approval of the Commission.
C. Request 5 - Creation of One or More Entities to Participate in
Gas Distribution in New Hampshire
According to CMP, if a CMP affiliate participates in the gas business
in New Hampshire it would likely be a wholly-owned subsidiary of HoldCo, either
GasCo or a separate wholly-owned subsidiary of either GasCo or HoldCo. CMP seeks
Commission approval of the creation of one or more entities, one of which may be
a wholly-owned subsidiary of HoldCo, to participate in the gas distribution
business in New Hampshire. Sufficient information does not exist for us to grant
this approval. When its plans become more definite, CMP can apply for approval
at that time. Therefore this request is denied.
D. Response to Opposition to Summary Judgment
The Public Advocate's primary concern relates to the application of
Chapter 820's royalty provisions to these gas ventures. As described above, CMP
states that it no longer plans to use the CMP name in the name of its gas
venture. As explained in V.B. above, if CMP continues to be identified in the
marketing of the gas venture in the manner described in the CMP marketing
materials attached to Mr. Rubin's testimony, Chapter 820 royalty requirement
will be applicable.
Bangor Gas argues that we cannot grant CMP's requests for gas
reorganization approvals until after we decide whether to approve the formation
of the holding company. On May 1, 1998, we approved the formation of the holding
company; therefore Bangor Gas's objection is moot. Bangor Gas also complains
that CMP failed to include affidavits with its motions. We consider the prefiled
testimony as the equivalent of affidavits. In addition, on April 22, 1998, CMP
submitted the affidavit of Mr. Adelberg swearing to the truthfulness of its
application in Docket No. 97-930, the prefiled testimony in Docket No. 98-077,
all data responses in Docket No. 97-930 and 98-077 and responses during the
technical conferences in Docket No. 97-930.
VI. CONCLUSION
As described above, we approve CMP's request for creation of GasCo and
Maine Natural Gas Limited Liability Company. We also approve the Joint Venture
Agreement included as Exhibit G of CMP's December 9, 1997 filing, in Docket No.
97-930, with the condition that the agreement is transferred to GasCo from CMP.
We do not approve the transfer of any rights-of-way from CMP nor, at this time,
do we approve the creation of one or more entities to participate in the gas
distribution business in New Hampshire. CMP should resubmit the support services
agreement between Maine Natural Gas and CMP T&D with revised provisions that
conform with Chapter 820. Non-core activities and transactions between
affiliates will be governed by Chapter 820 of the Commission Rules. We accept
conditions 1, 2, 3, 4 and 6 as proposed by CMP and described in Section III
above, as necessary to further protect the interests of CMP's ratepayers.
Dated at Augusta, Maine, this 1st day of May, 1998.
BY ORDER OF THE COMMISSION
Dennis L. Keschl
Dennis L. Keschl
Administrative Director
COMMISSIONERS VOTING FOR: Welch
Nugent
Commissioner Hunt did
not participate in this
decision.
NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. sect. 9061 requires the Public Utilities Commission to give
each party to an adjudicatory proceeding written notice of the party's rights to
review or appeal of its decision made at the conclusion of the adjudicatory
proceeding. The methods of adjudicatory proceedings are as follows:
1. Reconsideration of the Commission's Order may be requested under
Section 6(N) of the Commission's Rules of Practice and Procedure
(65-407 C.M.R.11) within 20 days of the date of the Order by filing a
petition with the Commission stating the grounds upon which
consideration is sought.
2. Appeal of a final decision of the Commission may be taken to the Law
Court by filing, within 30 days of the date of the Order, a Notice of
Appeal with the Administrative Director of the Commission, pursuant to
35-A M.R.S.A. sect. 1320 (1) - (4) and the Maine Rules of Civil
Procedure, Rule 73 et seq.
3. Additional court review of constitutional issues or issues involving
the justness or reasonableness of rates may be had by the filing of an
appeal with the Law Court, pursuant to 35-A M.R.S.A. sect. 1320 (5).
Note: The attachment of this Notice to a document does not
indicate the Commission's view that the particular
document may be subject to review or appeal. Similarly,
the failure of the Commission to attach a copy of this
Notice to a document does not indicate the Commission's
view that the document is not subject to review or
appeal.
1 At CMP's request, the Commission issued an order on January 27, 1998 granting
interim approval to incorporate a holding company for the limited purpose of
allowing CMP to make required Securities and Exchange Commission filings.
2 The Commission provisionally adopted Chapter 820, which governs transactions
between affiliates, on February 18, 1998. The Legislature approved this major
substantive rule, with certain amendments, by resolve enacted on March 30, 1998.
Therefore, the rule will be effective following the Commission's adoption of it
with the required amendments after June 30, 1998 (the effective date of the
resolve.)
EXHIBIT H-1
Exhibit H-1
UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
CMP Group, Inc. ) File No.
New England Gas Development Corporation ) _______
Notice of Filing
Take notice that CMP Group Inc. ("CMP Group"), 83 Edison Drive,
Augusta, Maine 04336, an exempt public utility holding company pursuant to
Section 3(a)(1) of the Public Utility Holding Company Act of 1935, as amended
("the Act"), has filed an Application pursuant to Sections 3(a)(1), 9(a)(2) and
10 of the Act in which CMP Group requests the Securities and Exchange Commission
to approve the transaction (the "Transaction") pursuant to which CMP Group will
acquire, through New England Gas Development Corporation ("New England Gas"), a
wholly-owned subsidiary of CMP Group, up to 50% of the membership interests of
CMP Natural Gas, L.L.C. ("Maine GasCo"), a Maine limited liability company.1
Maine GasCo will construct, own and operate a local natural gas distribution
system in Maine.
CMP Group's principal subsidiary, Central Maine Power Company ("CMP"),
is an electric utility company, primarily engaged in the business of generating,
purchasing, transmitting, distributing and selling electric energy for the
benefit of retail customers in southern and central Maine and wholesale
customers, principally other utilities. CMP serves approximately 528,000
customers in its 11,000 square-mile service area in southern and central Maine.
CMP is also an exempt public utility holding company pursuant to Section 3(a)(1)
of the Act.
The Maine Public Utilities Commission ("MPUC") has authorized Maine
GasCo to furnish natural gas service, on a non-exclusive basis, in certain areas
of Maine not currently receiving natural gas service. Maine GasCo expects to
derive its supply of natural gas from the Western Canadian Sedimentation Basin
via the proposed Portland Natural Gas Transmission System pipeline and from the
gas fields near Sable Island off Nova Scotia via the proposed Maritimes &
Northeast pipeline. As a public utility under Maine law, Maine GasCo will be
subject to regulation by the MPUC as to rates and other matters.
It is currently contemplated that CMP Group, through New England Gas,
will acquire up to 50% of the membership interests of Maine GasCo and EEC,
through EEC Enterprises, will hold the remaining membership interests. The MPUC
has authorized initial capital contributions by the members of Maine GasCo
totaling approximately $20 million.
New England Gas and EEC Enterprises are parties to a Joint Venture
Agreement dated as of November 13, 1997, as amended (the "Joint Venture
Agreement"), which provides for, among other things, the formation of Maine
GasCo. Each member's ownership interest is subject to adjustment in accordance
with the Joint Venture Agreement. The Joint Venture Agreement establishes a
Management Committee consisting of three New England Gas appointees and three
EEC Enterprises appointees and generally vests a designated Manager, who will be
located in Maine, with exclusive authority to manage the business of Maine GasCo
within the limitations set forth in the Joint Venture Agreement. The Joint
Venture Agreement authorizes the Manager to perform any and all acts customary
or incident to the business of Maine GasCo. The Joint Venture Agreement also
authorizes the Manager to delegate authority and to hire or contract for
appropriate and necessary services. Certain actions may be taken by the Manager
only upon the affirmative vote of a majority of the members of the Management
Committee. The Joint Venture Agreement provides for the resolution of stalemates
or impasses among the Management Committee by appeal to the Chief Executive
Officers of the Maine GasCo members, and by arbitration in the event that the
Chief Executive Officers are unable to resolve the impasse.
The applicant states that the Transaction will satisfy all of the
requirements of Section 10 of the Act, including Section 10(c)(1) of the Act.
Specifically, (1) the Transaction will not tend towards interlocking relations
or the concentration of control of public utility companies to the detriment of
investors and consumers; (2) the consideration, including all commissions and
fees, to be paid in connection with the Transaction is reasonable; (3) the
Transaction will not unduly complicate the capital structure of the CMP Group
holding company system; (4) the Transaction is in the public interest and the
interests of consumers and investors; (5) the Transaction will tend towards the
development of an integrated gas utility system; and (6) the Transaction will
comply with all applicable State laws.
Section 10(c)(1) of the Act requires, inter alia, that the proposed
acquisition not be "detrimental to the carrying out of the provisions of Section
11." The primary issue with respect to the Transaction is whether, under Section
10(c)(1), the creation of an exempt holding company system from the acquisition
by an electric system of a gas system is detrimental to the carrying out of the
provisions of Section 11. Section 11 of the Act relates to the simplification of
holding company systems. Although the applicant believes that Section 11 is
inapplicable, the applicant believes nonetheless that the Transaction meets the
conditions of Section 11(b)(1). Furthermore, the Act does not specifically
prohibit ownership by an exempt holding company of both electric and gas utility
properties. The applicant states that a transaction is not detrimental to the
provisions and policies of Section 11 where the resulting system will be an
exempt holding company and the applicants can demonstrate that adequate
regulatory authority exists to protect local ratepayers, that the resulting
system is a coherent system and not one where great and irrational distances
divide the operating utilities, and there are benefits to be gained by at least
one of the operating utilities as a result of the transaction. The applicant
goes on to state that the Transaction will result in a combined system which
will not be detrimental to the carrying out of Section 11. The combined system
will consist of a large integrated electric utility system and a smaller
integrated gas utility system which together will operate on a coordinated basis
offering services to customers in the same state. Also, the Transaction will not
be detrimental to the carrying out of the provisions of Section 11 inasmuch as
CMP Group will carry out its utility operations within the state of Maine, its
utility operations will be subject to adequate regulatory authority in Maine and
will not be the type of nationwide, complex system that Section 11 was designed
to prevent. The Transaction will provide CMP Group with the most efficient basis
for entering into natural gas operations as a local distribution company and
provide Maine GasCo with greater financial and other resources, allowing both
companies to remain competitive with the emerging one-stop energy services
companies.
Section 10(c)(2) of the Act requires that an acquisition not be
approved unless the Commission finds that it "will serve the public interest by
tending towards the economical and efficient development of an integrated
public-utility system." The applicant states that Maine GasCo may receive a
number of centralized services from CMP Group subsidiaries allowing it to
capture economies and efficiencies for the Maine GasCo system; however, the
Maine GasCo system will be operated on a day-to-day basis by a local operator
(Maine GasCo), and the Maine GasCo system will be regulated by the MPUC with
regard to rates and other matters. Thus, the Maine GasCo system will be locally
operated and locally regulated, but will have the economic advantage of certain
centralized services.
The applicant states that CMP Group will continue to qualify for
exemption under Section 3(a)(1) of the Act as an "intrastate" holding company,
and New England Gas will qualify for such exemption, even after acquiring Maine
GasCo's voting securities, because both CMP Group and New England Gas, and their
public utility subsidiaries, will be predominantly intrastate in character and
will carry on their business substantially in the State of Maine, the state in
which they are all organized.
All interested persons are referred to the application for complete
statements of the proposed transaction summarized above. The application is
available for public inspection through the Commission's Office of Public
Reference.
Interested persons wishing to comment or request a hearing on the
application should submit their views in writing by _____________ __, ____, to
the Secretary, Securities and Exchange Commission, Washington, DC 20549, and
serve a copy on the applicant at the address specified above. Proof of service
(by affidavit or, in case of an attorney at law, by certificate) should be filed
with the request. Any request for hearing shall identify specifically the issues
of fact or law that are disputed. A person who so requests will be notified of
any hearing, if ordered, and will receive a copy of any notice or order issued
in the matter. After said date, the application, as filed or as amended, may be
granted.
1 The remaining membership interests of Maine GasCo will be held by Energy East
Enterprises, Inc. ("EEC Enterprises"), a wholly-owned subsidiary of Energy East
Corporation ("EEC"), an exempt public utility holding company and the parent
holding company of New York State Electric & Gas Corporation ("NYSEG").
